Avista Corp (AVA) 2014 Q3 法說會逐字稿

Welcome to the Q3 2014 Avista Corporation earnings conference call. My name is Adrienne, and I will be your operator for this call. At this time, all participants are in a listen-only mode. Later we'll conduct a question-and-answer session. Please note this conference is being recorded. I'll now turn the call over to Jason Lang, you may begin.

Thanks Adrienne. Good morning everyone. Welcome to Avista's third quarter 2014 earnings conference call. Our earnings were released pre-market this morning, and the release is available an our website at AvistaCorp.com. Joining me this morning are Avista Corporation 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, and our Form 10-Q for the second quarter of 2014, 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 earnings from continuing operations for the third quarter of 2014 were $0.16 per diluted share, compared to $0.14 for the third quarter of 2013. Our consolidated earnings for the third quarter of 2014 were $0.16 per diluted share, compared to $0.19 for the third quarter of 2013. On a year-to-date basis, earnings from continuing operations were $1.45 per diluted share, compared to $1.23 last year, our consolidated earnings for the year-to-date were $2.59 per diluted share for 2014, compared to $1.32 last year. Now I'll turn the discussion over to Scott.

Thank you Jason, and good morning to everyone. We continue to experience a strong 2014 in terms of achieving the milestones we've set for earnings growth and positioning our Company. The recent completion of the sale of Ecova, and the acquisition of Alaska Electric Light and Power Company, continued to provide the opportunity for earnings growth going forward, including exploring new market opportunities in southeast Alaska. We're excited to have AEL&P as part of our Company, and we look forward to becoming an integral part of the Juneau community.

With respect to regulatory matters, in August we reached an all party settlement agreement in our Washington general rate case filed in February 2014, new rates would take effect on January 1st, 2015. The settlement is designed to increase annual electric base revenues by $7 million, and annual natural gas base revenues by $8.5 million. We expect the Washington Commission to issue an order regarding the settlement before the end of 2014. In September, the Idaho Commission approved a settlement agreement with all interested parties for a one-year extension to our current rate plan, which was set to expire at the end of 2014. Under the extension, base retail rates remain unchanged through the end of 2015.

In September we filed a natural gas general rate case in Oregon, requesting an overall increase in base natural gas rates of $9.1 million. The Oregon Commission has up to ten months to review the case and make a decision. If approved, new rates would take effect no later than July 2015. AEL&P is continuing to evaluate the need to file an electric generate case, and we don't expect a filing in 2014. Based on our strong 2014 thus far, and our expectations for the fourth quarter, we are confirming our 2014 earnings guidance with a consolidated range of $3.00 to $3.20 per diluted share. We expect to be in the upper half of this range, including the impacts of the ERM. We're also initiating our 2015 earnings guidance, with a consolidated range of $1.86 to $2.06, an increase of 4.8% over our original 2014 earnings guidance at the midpoint, and Mark is going to provide more detail on our earnings guidance in a few minutes. And I'm going to turn it over to Mark.

Thank you Scott. Good morning everyone. Our utility earnings contributed $0.16 per diluted share for the third quarter of 2014, compared to $0.16 in the third quarter of last year. And on a year-to-date basis, Avista Utilities contributed $1.38 per diluted share, an increase from $1.27 last year. For the third quarter of 2014 we recognized a pretax benefit of $0.4 million under the Energy Recovery Mechanism in Washington, compared to an expense of $4.7 million in the third quarter of last year. Recall last year in the third quarter, we had one of our units at Coal Strip down for the entire quarter.

For the nine months ended September, we recognized a pretax benefit under the ERM of $5.3 million, compared to a pretax expense of $0.5 million last year. For the full year of 2014, we do expect to be in a benefit position within the 75% customer and 25% company sharing band. We continue to be committed to updating and maintaining our utility system, in the first nine months we spent $229 million on Avista Utilities capital expenditures, we expect capital expenditures to be about $355 million in 2014, and similar in 2015 and 2016. We expect approximately $3 million in the second half of the year, and $15 million for 2015 and 2016 in related capital expenditures for AEL&P.

I'm now going to discuss kind of our liquidity and financing plans. We have a $400 million committed line of credit with various financial institutions at Avista Utilities, and in April we amended this agreement to extend the expiration to April of 2019. That is an additional two years from its previous date. And as of September 30th of 2014, there were $35 million of cash borrowings, and $45.6 million of letters of credit outstanding, leaving $319 million of available liquidity under that line. AEL&P has a committed line of credit in the amount of $14.5 million, with an expiration of June of 2015. As of September 30th, there were no borrowings outstanding under that facility. In September of 2014 AEL&P issued $75 million of 4.54% first mortgage bonds, the proceeds of which were used to repay approximately $38 million of existing AEL&P debt, and the remainder of the proceeds, together with some cash on hand were paid as a cash dividend of $50 million to Avista Corp associated with rebalancing the consolidated capital structure at AERC.

In addition to the first mortgage bonds, we expect to issue $15 million in term loans at AERC during the fourth quarter of 2014. In October we entered into a bond purchase agreement with three institutional investors in a private placement market to issue $60 million of Avista Corp. first mortgage bonds that are expected to be issued in December of 2014, the first mortgage bonds will bear an interest rate of 4.11%, and will mature in December of 2044. In the first nine months of 2014, we issued $153.5 million of common stock, $150.1 million associated with the acquisition of AERC, and the remainder under dividend reinvestment and direct stock purchase and employee plans. We don't expect to issue any additional shares for 2014, other than those under the dividend reinvestment and direct stock purchase and employee plans.

On July 7th of this year, we commenced a stock repurchase program to repurchase up to 4 million shares of our outstanding common stock. The program will expire on December 31st of 2014, and we have the option to terminate the program before that date. Through October 31st, we have repurchased 2.5 million shares at a total cost of approximately $80 million, at an average cost of $31.57 per share. For 2015, we expect to issue approximately $100 million of long-term debt, and approximately $30 million of common stock to maintain an appropriate capital structure.

I'll now talk about our guidance. As Scott mentioned earlier, we are confirming our 2014 earnings guidance of $3.00 to $3.20 per diluted share, and we expect to be in the upper half of this range, including the impacts of the ERM. Our updated guidance includes the dilutive impact from issuing the 4.5 million shares of common stock on July 1 for the acquisition, the Alaska acquisition, as well as our current expectation to repurchase the 4 million shares of common stock through our repurchase program by December 31st of this year. We expect Avista Utilities to contribute in the range of $1.79 to $1.94 per diluted share for 2014. During the second quarter of this year we increased our guidance, from initial guidance range of $1.68 to $1.82 per diluted share at the Utility. We expect to be in the upper half of this range, including the impacts of the ERM.

In 2014, as I mentioned earlier, we expect to be in a benefit position under the ERM within the 75% customer/25% company sharing band, and our range for Avista Utilities encompasses the expected variability in power supply costs, and the application of the ERM to that power supply cost variability, our outlook for Avista Utilities assumes, among other variables, normal precipitation, temperatures, and hydroelectric generation for the remainder of the year. We expect AERC to contribute in the range of $0.03 to $0.04 per diluted share for the second half of 2014. Historically their earnings have been approximately two-thirds in the first half of the year, and one-third during the second half of the year.

Our outlook for AEL&P assumes among other variables, again, normal precipitation, temperatures and hydroelectric generation for the remainder of the year. We expect Ecova to contribute in the range of $1.13 to $1.15 per diluted share for the six months of earnings and the net gain on the sale, which is consistent with what we reported in the past. And we expect other businesses to contribute between $0.05 and $0.07 per diluted share.

With this press release, we're also initiating 2015 guidance for consolidated earnings to be in a range of $1.86 to $2.06 per diluted share. We expect Avista Utilities to contribute in the range of $1.81 to $1.95 per diluted share for 2015, and as compared to 2014 we expect our Avista Utilities earnings to be positively impacted by general rate increases, yet they will continue to be limited by slow load growth and growth in operating expenses. Our range for Avista Utilities encompasses expected variability in power supply costs and the application of the ERM to that variability, and the midpoint of our guidance range for Avista Utilities does not include any benefit or expense related to the ERM. Our outlook for Avista Utilities assumes among other variables normal precipitation, temperatures, and hydroelectric generation. It's also important to note that our guidance assumes the implementation of our settlement in the Washington general rate case on January 1st, 2015, which is still subject to approval by the Washington Utilities and Transportation Commission. For 2015, we expect AEL&P to contribute in the range of $0.08 to $0.12 per diluted share, and our outlook for AEL&P includes, among other variables, normal precipitation, temperatures, and hydroelectric generation. Finally, we expect our other businesses to be between a loss of $0.01 and a loss of $0.03 per diluted share, which includes costs associated with exploring for strategic opportunities. Overall, our guidance generally includes only normal operating conditions, and does not include unusual items such as settlement transactions, impairments, acquisitions or dispositions, until the effects are known and certain. With that, I'll now turn the call back over to Jason.

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

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And we have Paul Ridzon from KeyBanc online with a question. Please go ahead.

Good morning.

Good morning, Paul.

As you continue to look at strategic initiative, any leaning up towards anything else on update us on?

Well, we continue to look at our opportunities in LNG. We're looking in Alaska for opportunities to possibly bring gas there. They're largely a diesel based service area. And so if we can replace diesel with natural gas, that's an opportunity to look at. And we continue to pursue that. We're also pursuing that around Hawaii or transportation, marine fueling, so we continue to look at that. We'll update you when you have significant events to do that. At this point we are spending a lot of time looking at it, but we don't have a particular event to say, here's what we're doing specifically. And we will do that when we have that type of opportunity.

Got it. And then just looking past 2015, what are you thinking about as far as financing needs?

Well, we haven't come out with guidance for beyond 2015, but again, we'll continue, we do expect with our capital, the 5% to 6% rate base growth, and spending $350 million of capital, we will have some financing needs, and we'll continue to finance our balance sheet in a prudent manner, which would include some debt and some equity, as we continue to, we'll use some of our earnings as growth, and use that to support some of our CapEx, and we will have some financing needs, but given we haven't really provided any forward guidance beyond 2015, I don't have any specifics.

Just given kind of a flat CapEx in 2016, kind of maybe similar to 2015?

You could make that assumption but I don't have all the details of the moving parts.

Fair enough.

Historically Paul, we've been between $25 million and $50 million in equity, and then this year we did $60 million, so maybe $60 million and $125 million in debt. Those are broad ranges. I think we'd be in those ranges.

Okay. Thank you very much. Fair enough.

Thanks, Paul.

And the next question comes from Michael Weinstein from UBS. Please go ahead.

Hi, guys, how you doing?

Hi, Mike.

Hi, Mike.

Just curious, first question, the last page in your presentation where you have the question slide, it looks like an awfully troubled water going under that bridge. Is that supposed to mean something?

No.

Anyway, with big rocks in the way, too.

We are a utility. That is exciting for us. That's good stuff.

I was wondering if you guys have any insight into what Coal Strip might need in terms of SCRs going forward? My understanding is that all four units over there, there are no SCRs on anything? It's kind of an off the wall question.

This is Dennis. We're currently evaluating the need of SCRs for Units 3 and 4. The timing of it essentially. Recall that we are 15% owners of Units 3 and 4. We have no ownership interest in Units 1 and 2. So we're continuing to look at that. 2020 is the timeframe, somewhere in there is likely to be when that might be required.

Okay. And has there been any impact on the buyback from the higher stock prices you guys have experienced in the last couple of weeks?

Well, in the last couple of weeks, yes, we gave you through October we had $2.5 million. Our guidance assumes that we'll get there. If we don't get there, because we didn't buy back due to the run-up in price, it will just we will be slightly over-equitized going into next year. As we reported in next year's guidance we expect $30 million in equity next year. So even if we don't get it done this year, I think it would only be a couple cents dilution to next year, so I don't think it's really a big deal if we get it done or not, but we haven't been buying at these recent prices. Our average price was $31.57, I believe. I know we disclosed it. I just couldn't have it in front of me. So I think at these prices, we're probably not in the market to buy, but I don't think it's a big impact.

And my last question, just about the Alaska rate case filing, I'm not sure if you said this, I might have missed it, could you just talk about what you plan to file for, and what the strategy there going forward would be?

Yes, this is Kelly. We worked with AEL&P to see what's there, and generally speaking, the rate base has been relatively flat in the last year or two, and of course there's plans going forward for additional investment there, but because of that, they're managing their expenses, right now there's not an immediate need to file a case, but we'll look at that in early 2015.

Okay. Thank you very much.

Thanks, Mike.

And our next question comes from Michael Worms from BMO Capital Markets. Please go ahead.

Thank you, good morning everyone.

Hi, Mike.

Can you just talk a little bit about the other in 2014, it looks like it will add about $0.05 to $0.07 a share, and then you lose it in 2015. Can you just tell us what the moving parts are there? And just as a comparative basis, what other contributed in 2013?

Well, I don't recall what Other contributed in 2013. In 2014, the big difference is, we got the settlement from Avista Energy, which was about $15 million, and so that resulted in earnings, that's pretax, and then we made a $6.5 million donation to The Avista Foundation, so that's an expense, so on a net basis, so that really drove 2014's number to be what it was. And then with respect to 2015, that's largely just, again, continuing to have some cost to analyze strategic opportunities. We've said we expect to spend around $3 million to continue to analyze opportunities in LNG, and then opportunities in southeast Alaska, so we'll continue to spend those. And so that's what's in those costs. We have some small other businesses in there that have some moving parts, but it's really not significant. Metal FX makes about $1 million a year. I think from a 2014 to 2015, that's what that is, Mike. I don't recall what happened in 2013.

Okay. I can look that up. Thanks a lot. See you next week.

Alright. Thanks, Mike.

(Operator Instructions). Jim von Riesemann from CRT Capital online with a question. Please go ahead.

Hey guys, how are you this morning?

Good, Jim.

Hi Jim.

I have a couple of questions. I know there's some legislative activity going on in both Oregon and the state of Washington with respect to climate change, I guess in Oregon it is this 306 Senate Bill, and there's supposed to be some disclosures made by mid-month on the 15th. Can you talk a little bit about that, and then talk about Governor Inslee's climate, basically to eliminate coal by wire in this state, and what sort of progress you might be making there on either reaching a settlement or coming to a good outcome?

Jim, in Oregon, because we're a gas-only utility, we really haven't been following 306 particularly close. We don't feel from a business perspective, we observe it. So I can't really comment on the details on 306, but in Governor Inslee's agenda, I would say that the Governor, as you know, is very passionate on climate change, the results of the Senate races in Washington state last night, means that the State Senate will state Republican. So my sense would be, it will be difficult for the Governor to execute around all of the strategies around climate change, as he's seen, or as explained. So we'll continue to work with the Governor to see what we can do to work collaboratively with him. But I would suspect that it will be a slower go for the Governor with his plans. And as we like to remind the Governor, we're one of the greenest utilities, not just in Washington state but in the country. We have one of the lowest carbon footprints of any utility. So no matter what the Governor really implements, we feel like we're well-positioned already.

Okay. Do you have any idea of when we may get some sort of closure on this topic, or is it going to just naturally die out maybe?

What I would just say is, Governor Inslee has said, it's one of the key planks of his administration, so my sense is that he is going to stay very focused on it. So whatever he chooses to do in 2015, I would suspect that it will continue in 2016, and into his re-election campaign. So I don't expect it to go away.

Okay. Thank you.

Thanks, Jim.

And we have no further questions at this time.

I'd like to thank everyone for joining us today. We certainly appreciate your interest in our Company. We look forward to seeing all of you at EEI. Have a great day.

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