Avista Corp (AVA) 2014 Q1 法說會逐字稿

Good morning, welcome to the first quarter 2014 earnings conference call. My name is Brandon and I will be your operator. 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 turn it over to Mr. Jason Lang. Jason, you may begin.

Thanks, Brandon and good morning, everyone. Welcome to Avista's first quarter 2014 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 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 2013 which is available at our website. In addition we plan to file our Form 10-Q for the first quarter of 2014 later today.

To begin this presentation, I would like to recap the financial results presented in today's press release. Our consolidated earnings were $0.81 per diluted share for the first quarter of 2014, compared to $0.71 for the first quarter of 2013. Now I will turn the discussion over to Scott.

Thank you, Jason and good morning, everyone.

To start, I do want to mention that our company is celebrating its 125 year anniversary serving our customers and communities with safe, reliable energy this year. On March 13, 1889, the incorporation papers forming the Washington Water Power Company were signed here in Spokane, eight months before the Washington Territories became a state. There are only three territorial companies remaining in the state, and we're very proud to be one of them.

As part of our anniversary celebration last week we re-dedicated Huntington Park and celebrated City Plaza, a beautiful area along the river that provides extraordinary views and a close up experience of our magnificent lower falls in downtown Spokane. Our history of innovation, and service excellence continues to be reflected today in the work of our employees and what they're doing to meet the energy needs of our customers and to lay a solid foundation for the energy demands of the future.

Turning to the results our first quarter consolidated and utility earnings were above our expectations and we are off to a good start this year. Our utility earnings increased due to colder than normal weather, which increased both electric and natural gas retail heating loads. We continue to make progress toward completing the acquisition of Alaska Energy and Resources Company, and we do expect to close by July first. The transaction reflects our strategy to expand and diversify energy assets and deliver long-term value to the customers, communities, and investors that we serve.

Ecova had a solid first quarter, and is on track to meet our expectations for 2014. As you will recall in the past, we have discussed our interest in potentially monetizing our investment in Ecova. During 2012, Ecova had a difficult year, with earnings below our expectations, and we said we needed to reprove the business with solid performance in 2013, and we did just that. And we continue with that performance in 2014.

Because of this, we believe now is the right time to explore opportunities to potentially monetize our investment. We still believe in the great growth and long-term earnings potential of this company. However, we believe that someone else may be better suited to take this company to the next level. As we mentioned in the earnings release this morning, we are in the process of exploring a possibility of selling our interest in Ecova. We have received offers that we are evaluating. However, there's no assurance that the terms of any proposed transaction will ultimately be acceptable to the company, that the conditions to any proposed transaction would be satisfied, or that any proposed transaction would be completed. If no such transaction is completed, we will continue to support Ecova's growth initiative. The value of any potential sales transaction will depend on market conditions, transaction structure and other factors.

With better than expected earnings during the first quarter and based on our outlook for the remainder of the year, we are confirming our 2014 earnings guidance. We expect to be near the upper end of the range, including the impact of the ERM. This excludes any impact from the planned acquisition of AERC, and Mark will provide more details on our earnings guidance in just a few minutes.

So with that, I am going to turn it over to Mark.

Thank you, Scott. Good morning, everyone. I just want to give a report that's better than my Blackhawks did last night. So we have good earnings to report and we are happy with that. Utility earnings contributed $0.80 per diluted share for the first share of 2014, an increase from $0.71 last year. The increase was primarily due to colder weather which Scott mentioned which increases our heating loads. And the [input] also helping that was the implementation of general rate cases in each of our jurisdictions, and these were partially offset by expected increases in other operating expenses, depreciation and amortization and taxes other than income.

For the first quart of 2014, we did recognize a pretax benefit of $1.3 million under the energy recovery mechanism in Washington, that compares to a benefit last year of $3.1 million. And for the full year of 2014, we expect to be in a benefit position within the ERM within the 75%/25% company sharing band. We are committed to updating and maintaining our system, and in the first quarter we did spend $60 million on utility CapEx. Recall we expect to spend about $355 million this year in CapEx, and over $350 million in 2015 and 2016.

Moving on to Ecova, their first quarter earnings were consistent with the first quarter last year at $0.02 per diluted share. This does include about $0.5 million of costs associated with looking into the opportunity to evaluate these offers that we have had. Ecova's revenues increased 5% and totaled $44.4 million, and this was an increase primarily from energy management services. Their total operating expenses, including the cost to evaluate the transaction, increased about 5% this year.

Our net loss on our other businesses was a $0.01 per diluted share for 2014.The net loss includes corporate costs and costs with exploring strategic opportunities and these are partially offset by net income at METALfx.

We continue to look at opportunities to develop new markets and ways for customers to use electricity and natural gas primarily through LNG and CNG, and we expect to continue that effort as we go forward.

I'm now going to discuss our liquidity and financing plans. In April of 2014, we amended our $400 million credit facility and extended the expiration date to 2019, which is two years to April of 2019. As of March 31, we had $279 million available liquidity under our $400 million facility with $111 million of cash borrowings, and $9.6 million of letters of credit outstanding.

In 2014, we continue to expect to issue approximately $145 million of common stock, primarily related to the closing of the acquisition of AERC, and to maintain an appropriate capital structure for our business. We also plan to issue approximately $190 million of long-term debt, including about $90 million of combined debt issuances at AERC and AEL&P, associated with the rebalancing of the capital structure of at that company.

As Scott mentioned earlier, we are confirming our 2014 earnings guidance consolidated to be in a range of $1.77 to $1.97 per diluted share, but we do expect to be near the upper end of our consolidated and utility earnings guidance range including the impacts of the ERM. This range does not include any impact from the planned acquisition of AERC, and we expect that the addition of AERC to Avista Corp will be slightly dilutive to earnings per share in 2014, and then it will be accretive to earnings per share in 2015 and beyond. We expect Avista Utilities to contribute in the range of $1.68 to $1.82 per diluted share, and we expect to be near the upper end of the range, including the ERM. We expect Ecova to contribute in the range of $0.12 to $0.16 per diluted share, and we expect the other businesses to lose between $0.01 and $0.03 per diluted share. Our guidance, including 2014 guidance, generally includes only normal operating conditions and does not include unusual amounts, such as settlement transactions, impairments, acquisitions and dispositions until the effects of those activities are known and certain.

I will now turn the call back over to Jason for questions.

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

(Operator Instructions). And from Avon Capital, we have Andy Levi. Go ahead.

Wow, I never get to go first. How are you guys doing?

Good morning, Andy.

Glad to see you guys putting Ecova up for sale. Just to confirm, you're actually selling the company, right? That's the plan, right?

To sell the company, yes.

Right. No IPO or anything like that, right?

No, not at this point. We looked at all of our opportunities and felt this was the best avenue.

Okay. Is it possible, could you frame, again, the potential proceeds and also what is the tax basis of the company?

You know to the extent we get a transaction, we'll come out with that. We are evaluating the proposals that we have received. If we feel that it makes sense to do that, we will walk through all the details of that, with the different bases and the values of what we would expect to do with the cash. The cash, really, it's pretty simple on what is available to do with cash. You can invest in your businesses, you can pay a dividend, or you can buy back stock, or reduce debt. So those are the options, and until we have a determination of what the value and what the after-tax proceeds are going to be, I'm not going to speculate on what components of any of that we're going to do.

Is there a way to guide us? Will it sell at a multiple to EV to EBITDA, on a multiple to revenues, and a multiple to earnings?

You can calculate all of those types of things. Typically as we look at the business or businesses that are simple, we look generally at multiples of revenue or multiples of EBITDA. We haven't gone out and said what those values are, and we don't intend to in this call.

Okay. And again, would you hope this transaction would be as you get out to 2015 or 2016, maybe you would have had $0.18 of earnings from Ecova, kind of our estimate, not your estimate. So with the option as you said to either reinvest it, buy back stock, pay down debt, or do a combination of all three, should this transaction be neutral to earnings, accretive to earnings, you think, or is that kind of part of the decision-making process on the offers that you get?

I think that is part of the decision making process on what we get and we will evaluate -- the value that we receive in a potential transaction. Again, I want to make sure that I do state we may not conclude a transaction as Scott mentioned in his comments, if we don't get a transaction that is at a value that we think makes sense. We like this business and we will continue to run the business. This isn't an attempt to have a fire sale. We think we have created, and the team there, has created great value for us, and that is what we would expect to have in this. So but to go through any specifics, that is really going to be determined based on what we see and if we reach agreement. When we reach agreement, we will issue information to the market about that agreement if it occurs.

Is your book -- I'm sorry go ahead.

If we don't reach a transaction, we will also come out. Now that we have mentioned the possibility, we will also come out and say we have suspended that activity if we're not able to reach agreement.

Is there a book value or what it is on the books for or anything like that?

Yes, we haven't disclosed it. If you look at our 10-Q and our 10-K there's a value of the investment. Right off the top of my head, I don't know what it is, but we do disclose that in our segment footnote. It is a separate segment. And recognize we own on a share basis, 80%.

Right. and timing, on when we may hear from you?

We'll, if we are able to construct the deal, we will announce it when we have a signed agreement, and if those talks break down and it determines that we're not going to be able to have a deal, we will have to disclose that at that time. I can't tell you how long it will be to be there. We are evaluating proposals. That can take some time.

Would it be fair to say by the end of the third quarter we should hear or by the end of the year?

Yes, yes, I would expect you know, we would expect at least by the end of the third quarter we would have information out there to update on this.

Okay. Whatever proceeds you get, you still need to issue the shares for Alaska, right?

Yes, that transaction is a stock deal.

Right, so you have to issue the shares. So any proceeds you get, again, would either be potential stock buyback, pay down a debt, or if you were to invest it in, somewhere else, what are you thinking there?

We invest a lot in our utility. We are looking at other opportunities. We have opportunities to invest, and we would look at that. We don't have anything announceable that would say there's a transaction out there. So that is, I'm not going to comment on that.

Yes. Yes. I guess it really comes down to proceeds and how much proceeds you get, then does it offset the earnings impact of losing Ecova, and also the growth from Ecova that was going to grow $0.03 or $0.04 a year. How does that come -- because they're trying to figure out what is the value of the stock once Ecova sold, and the proceeds.

Okay. Thank you very much, I took a lot of your time. I will follow-up with Jason off-line.

Thank you.

From KeyBanc, we have Paul Ridzon online. Please go ahead.

I always get to go first, and Andy stole my spot. What is the current condition of hydro?

I'm sorry, Paul -- the hydro condition?

Yes.

This is Dennis, we're sitting pretty good. As of yesterday, the Northwest River Forecast Center had the Clark Fork River at 134% of normal and remember the Clark Fork is where our biggest hydro generation is. And the Spokane River was at 129% of normal. Those look good, now remember that the run off actually is dependent on weather, how quickly it comes that will determine how much actual generation we get, but we're well above-normal on our forecast and we're in pretty good place.

I don't want to beat on Ecova, but was this decision, did you wake up one morning and decide it was time or were there people knocking on your door and that maybe drove your thought process?

Again what I would say is that we have always been extremely confident in the business. I said before that Ecova hit their numbers every single year that our expectations from 2004, except for the blip in 2012. We always do that, long-term there's a couple of drivers that made us realize that perhaps, we weren't the best holder of this business long-term and we have always thought about that. When the company performed well in 2013, which we expected because we knew that in 2012, there was really a lag based on some synergies that we thought we were going to develop in 2012. They didn't happen. We knew they would come in 2013, and they did. Once they did and we proved it, we felt like now was time to go ahead and test and see if it was something that we would do in the marketplace. No, it was our decision, and we're looking at it, and we will kind of go from there to see where this takes us.

In your commentary around not doing an IPO related to the concept that there's maybe a better natural owner of this?

Yes Paul, there's a couple of things that we really feel that you know, we really are excited about the organic growth opportunities, have always been. We've said a couple of things about the business that we think are exciting for it long-term. One is there's some really good international opportunities for this business. We're not experts in the international businesses, so that is one of the drivers. We also know that there's a number of acquisitions that can happen in this space, both small and large.

So as we evaluated the business for its long-term opportunities, we strongly looked at an IPO, but we also looked at the opportunity for this business to continue to grow, and felt like selling it was the best avenue for success. Now remember, Ecova has over 1300 employees, many of those are in Spokane, so we are very focused on the economic development piece of this. We want these jobs to stay in Spokane. We want to make sure this business stays healthy to the long-term. There's a lot of things that we're thinking about as we develop our strategies around this.

Is there any debt allocated to Ecova?

Yes, they have their own debt and we disclose that. We're filing our 10-Q later today, so you will see that.

Great. Okay. Thanks very much, guys.

Thanks, Paul.

From CRT Capital, we have Jim von Riesemann on. Please go ahead.

Hi, not to be beat the Ecova horse to death. But let me just start.

Can you just talk holistically about how you think about this modernization process? I know you said you're going to divest it, but what goes into the factors for either IPOing it or actually outright selling it? And then a follow-up question is with respect to your business, how should we think about Ecova, relative to, say, a Tango or an O Power and some of the growth they're getting out of there and why you may not be getting the similar type of growth?

Well, a couple of things. With our process, we evaluated all those opportunities as Scott said, and we felt this was the opportunity to pursue the sale, and we're looking at what we have. Again if we don't reach agreement, we don't reach agreement. It's got to be the right deal and make economic sense for us and our shareholders. That is what we would look at.

With respect to the other market transactions, there are businesses that are in and have different components, but Ecova is a very unique business and we don't see a direct comp in the market to that. They have a strong base with their client list or customer list, 24% of the Fortune 500 and they're continuing to grow that on the energy management business, and expense and data management, they're starting where we started. So there's companies that do those businesses out there, and then they have like as you mentioned Tango, the telecom side, that's a component of it as well. We also have the whole utility side of the business where they are serving utilities to do, energy management and demand-side management for [us].

So their business is unique. There are a number of public companies out there, but none of them are the same. We don't look at it. We look at it as how are their growth prospects and how are they going to continue to grow. And we're still very excited about that. So really we want to see strong value for that to have it go away.

I know the Washington construct or the corporate construct out there is a lot different than many other states. Do you need any regulatory approval, if you go ahead and divest it?

This is Kelly. It's been kept as an unregulated sub and it's been completely independent, so there's no need for specific regulatory approval.

Okay. Thank you, thank you guys.

Thank you Jim.

From Ladenburg Thalmann, we have Brian Russo online. Please go ahead.

Good morning.

Hi. Brian.

Maybe we could talk a little bit more about Ecova. Why announce that you're pursuing strategic alternative that may or may not materialize? Why not announce a transaction when it's actually signed?

Well, that's a good question, Brian, because typically that is what we would do. With respect, again with the Alaska transaction that Scott mentioned, we're looking to move forward with that and that's a stock transaction, but we have to file a registration statement. So there to issue that stock and their shareholders agreement or shareholders meeting is set up for June 10, and they need that registration statement 30 days prior, so their shareholders can have a full amount of information to evaluate whether they want to take Avista stock in that transaction.

We felt in looking at it, that we would come out and say we were far enough along in the process and looking at opportunities here, that we had to at least mention that we were doing that. So we were giving them the full story of what they could expect with our stock. So that is the reason for the timing. Typically we would wait, and we would have preferred to have just announced the deal, but given the timing of that transaction and the stock deal, we needed to put this out there.

Okay, that makes sense, understood. And then, just if we as investors and analysts are trying to figure out the tax basis with the tax friction in an outright sale, should we use that -- the investment value that you pointed to in your 10-Ks and Qs?

We haven't disclosed the tax basis. When it comes out, it will have if it's a sale and that's what we end up doing, it will have some tax leakage, but we believe that the value will be greater than what we could have gotten in other alternatives. We recognize that and that is all part of our evaluation as we look at whether we would expect to do this or not.

Okay, and just, on pure comps, I know you have two sides of the business, you have got kind of like a billing solution side, which I would imagine you could comp with ADP, and then you've got the energy efficiency, and management solutions business, which have different comps. Could you maybe talk about on that side of the business, who do you think your closest public comps are?

Again, there are a number of public companies that provide services like that, but I don't know, again I wouldn't say that they're particular comps specific to us. There are companies, EnerNOC, Ameresco, World Energy Solutions are companies that are public that provide energy management services. And then as you mentioned there's ADP, maybe a Paychex on the processing or payment processing, those are public companies. But there's not -- Ecova is unique. And the other part of that it doesn't even have the utility part of their business.

I would say, you'll have to make your own judgments on that. What we're looking at is what we believe is a good value, and if we receive that, we will transact. If we don't, we will come and say, you know what, we're still excited about this business going forward and we didn't get a value we thought made sense, so we're going to continue to run it. Until we make that decision and determination, then we will come out and tell you where we are. I know that may be a little frustrating, but that is really how we have to do this.

What who say the organic growth rate is in the business?

Again, we went from $0.10 to $0.14 to $0.12 to $0.16 and that is in our guidance room for 2013 to 2014. That would be the only thing that we have given on what an expected growth rate is.

Is that a percentage growth rate or is that the earnings estimate?

That's the cents per share. You can calculate it.

Okay. Got it. Are you guys going to file an AERC rate case, or is AERC going to file a rate case prior to the deal closure?

This is Kelly. If they file, we would likely wait until after the close of the transaction. AEL&P is putting some numbers together today so we will continue to look at that.

Okay, great, thank you.

Thanks, Brian.

From UBS, we have Paul Zimbardo online. Please go head.

Hi, good morning.

Hi, Paul.

I wish I could ask another Ecova question, but I think you're all exhausted.

(laughter). Thank you, Paul.

You mentioned CNG and LNG opportunities, could you elaborate a little bit more on that, please?

We have said in the past that we're looking at this, we continue to look at it, so we as part of the potential transaction and -- or the pending transaction in Alaska, they said can you look at that for Alaska? We have a group looking at that there. We've said before, we've looked at it, Hawaii has been public on that. We just announced earlier an investment in Plum Energy, and Plum is looking at smaller scale LNG.

So we're looking at different opportunities. When we have a transaction we will be ready and an announcement will come out. We are continuing to look at that. We are continuing to be excited about the opportunities there, but we don't know where that is going to take us. We don't have deals for these yet, so this -- we will just continue to look at that. And on the CNG side, largely, that has been more internal, and we continue to look at possibilities there externally but we haven't done as much there. It's mostly Ecova-comp utility.

Okay. And on the strategy strategic initiatives you were investigating, was there anything outside of CNG/LNG that you have been exploring for the company?

Not really.

Okay. Going back to the LNG. What kind of strategic advantage do you have? What would make one partner with you versus some of the large larger companies in this space?

I don't know that I would want to say that. That would give away our secrets, right? I think -- there's a lot of companies doing it, we look at it, if we can come up with unique ideas, we bring them forward. If that works for us that's great, and if it doesn't then we won't have those transactions. We think that we do have some unique ideas and ways to work that part of the business and we continue to work that.

Okay, thank you very much.

Thank you, Paul.

From Avon Capital we have Andy Levi back on line. Please go ahead.

I do have another Ecova question.

Andy.

Sorry. So, based on Brian's question, this kind of makes more sense to me now. I really didn't understand why you had kind of preannounced your announcement, I guess for no better way to put it. So basically, you had to since you were thinking of selling this company and you've had some offers, you had to disclose it, because of the Alaska transaction, the registration that you need to file there, right?

Yes.

So it wasn't like you were offered, or maybe you were, but there was some crazy number on the table and you just kind of wanted to give a little teaser, I guess for no better way to put it. You truly are evaluating various different offers. And had you gotten offers in the past, like last year or this was kind a new phenomenon?

You know Andy, we have always said was people have always been very interested in the business and we weren't actively shopping it at all. People have always been out, I think Mark gets a call every week about the business. So, -- but we decided to do a formal process, I guess is how I would put it.

Okay, so they have various rounds and things like that going on, is that fair? Round one, round two?

We're evaluating the offers. I'm not going to say any more, Andy. You can go around in circles. We're evaluating the offers, if they make sense, we'll do them, and if they don't we will tell you.

And again, the main thing is the reason you disclosed it was because of the registration that you have to.

Exactly.

Perfect. Thank you very much.

Thank you.

From CRT Capital we have Jim von Riesemann on the line. Please go ahead.

More Ecova questions too, sorry guys. In the event you sell it, how do you think of special dividends? Or is that something out of the realm of possibilities?

Again we will have to look in the event we sell it, what the proceeds are and what we to do with those proceeds. That would be something to consider as we look at what our options are.

Okay. And then on the flip side, let's say you don't sell it, because you don't think anybody wants to give you the value there. Do you need to commit any incremental OpEx or CapEx to the business?

Yes, to run their business, so, it's all within what our expectations are for the guidance for 2014, and when we give forward guide guidance for 2015 and 2016, would include that. We never include acquisitions in our guidance unless they are committed or done. That wouldn't have that. The ability to continue to work for that, we would look at that as if it was additive to what they could do already in our expectations.

Super. Thanks, guys.

Thanks, Jim.

(Operator Instructions). From KeyBanc, we have Paul Ridzon online. Please go ahead.

Have you engaged in advisers ?

We have.

Thank you.

Thank you, we will now turn it back to Jason Lang for any closing remarks.

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

This concludes today's conference, thank you for joining, you may now disconnect.