Avista Corp (AVA) 2014 Q4 法說會逐字稿

Welcome to the fourth quarter 2014 earnings conference call. My name is Joe, and I will be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded. I would now like to turn the call over to Mr. Jason Lang. Mr Lang, you may begin.

Thank you, Joe. Good morning, everyone. Welcome to Avista's fourth quarter and FY14 earnings conference call. Our earnings were released pre-market this morning, and the release is available on our website at www.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 of 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 actual results to differ materially from those discussed in today's call, please refer to our Form 10-K for 2013, and Form 10-Q for the third quarter of 2014, which are available on our website. Also, we are planning to file our 2014 10-K later today.

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 fourth quarter of 2014 were $0.48 per diluted share, compared to $0.51 for the fourth quarter of 2013. Our consolidated earnings for the fourth quarter of 2014 were $0.51 per diluted share, compared to $0.53 for the fourth quarter of 2013. For the full year, earnings from continuing operations were $1.93 per diluted share, compared to $1.74 last year. Our consolidated earnings for the year were $3.10 per diluted share for 2014, compared to $1.85 last year. Now, I'll turn the discussion over to Scott.

Well, thank you, Jason, and good morning, everyone. We had a transformational year in 2014, with the sale of Ecova, and the successful acquisition of Alaska Electric Light and Power. These are significant milestones for our Company, and it is fitting that they occurred during our 125th anniversary year. And in addition, we are pleased to continue our strong partnerships with the communities that we serve.

2014 was another strong year at Avista Utilities, with earnings above our expectations. Our new Alaska operations also met our expectations in the second half of the year. We're continuing to look at opportunities for corporate growth, and to bring value to our customers. This includes exploring ways to bring natural gas to southeast Alaska, and providing LNG for power generation, marine fueling, and as a transportation fuel in the western part of North America. We may also make other targeted investments that will help us gain strategic insights in building new growth platforms.

Over the past several years, we have been working hard to replace our 20-year old customer information and work management systems, which impact nearly every aspect of our business, and I'm excited to announce that earlier this month, we successfully completed the implementation of our two new systems, and I want to thank all the dedicated Avista employees and our contractors, who work so extremely hard to get this project done. Along with the information system project I just described, we are also making significant capital investments and upgrading our infrastructure, to preserve and enhance service reliability for our customers.

Earlier this month, we filed electric and natural gas general rate cases with the Washington Commission to recover these capital investments and other costs. Our requests are designed to increase annual base electric revenues by $33.2 million, and annual natural gas-based revenues by $12 million. In January, we filed an all party settlement agreement with the Oregon Commission, related to our natural gas general rate case. On February 23, the Oregon Commission rejected our settlement agreement, due to concerns over three primary issues relating to a temporary revenue credit to customers, the rate spread of the proposed new rates among customer classes, and our customer account tracking mechanism. The Oregon Commission encouraged the interested parties to work together to address these issues, and we will work to resolve the general rate case in a timely manner.

I'm pleased to report that earlier this month, the Board of Directors raised the quarterly common stock dividend by 4%, and this marks the 13th consecutive year the Board has raised the dividend for our shareholders. And lastly, we are expecting continued earnings growth in 2015, and we are confirming our 2015 earnings guidance, with a consolidated range of $1.86 to $2.06, and Mark will provide more details on our earning guidance in his remarks, so at this point I'm just going to turn it over to Mark.

Thank you, Scott. Good morning, everyone. For 2014, Avista Utilities contributed $1.83 per diluted share, an increase from $1.81 in the prior year. Earnings were slightly higher than originally expected, due to higher loads in the first nine months, lower power supply costs, and continued management of our expenses and lower interest costs. These increases were tempered by a provision for sharing our earnings with Idaho customers, and lower loads during the fourth quarter. Our utility contributed $0.45 per share in the fourth quarter of 2014, compared to $0.54 in the fourth quarter of last year. These earnings were below our expectations, primarily due to much warmer weather than the prior year, and much warmer than normal weather, which reduced our heating lodes.

For the fourth quarter of 2014, we also recognized the benefit of $0.1 million under the Energy Recovery Mechanism in Washington, and that compares to an expense of $4.2 million in the fourth quarter of 2013. For the full year, we recognized $5.4 million of a benefit under the ERM, compared to an expense of $4.7 million last year. That resulted from -- last year in 2013 recall that coal strip was out from July to the end of the year, and in 2014 the benefits largely due to -- we had a very strong hydro year. We continue to be committed to updating and maintaining our utility system, and in 2014, on a cash basis we spent $325 million for capital expenditures, and we expect our capital expenditures for 2015 to be about $375 million, and $350 million in each of 2016 and 2017.

If our Alaska utility, we expect to spend about $15 million in 2015 and 2016, and $13 million in 2017. A significant portion of these capital expenditures are for the construction of an additional back-up generation plant.

I'll now review our liquidity and financing plans. Avista has a $400 million committed line of credit with various financial institutions that expires in April 2019. As of December 31, there were $105 million of cash borrowings, and $32.6 million of letters of credit, leaving $262.4 million of available liquidity under this agreement. In November of 2014, AEL&P entered into a committed line of credit in the amount of $25 million that expires in November of 2019, and at December there were no borrowings outstanding under this agreement.

In December of 2014, Avista Corp. issued $60 million of first mortgage bonds in a private placement transaction, and those bonds bear an interest rate of 4.11%, and mature in December of 2044. Also in December, AERC entered into a $15 million term loan, which matures in December of 2019, and the proceeds of this loan were paid as a cash dividend to Avista Corp. This really completes the rebalancing of the capital structure with respect to our Alaska acquisition that we started in July of 2014.

During the second half of 2014, we repurchased 2.5 million shares of our outstanding common stock through a stock repurchase program, at a total cost of just under $80 million and an average cost of $31.57 per share. We didn't make any repurchases under this program subsequent to October of 2014. Then earlier this year, we initiated a second stock repurchase program, which will continue through March 31, 2015, for the repurchase of up to 800,000 shares of our outstanding common stock.

Through the end of January, we have not repurchased any shares under this program, and if current market conditions continue through the end of the first quarter, we don't anticipate purchasing any shares under this program. If this occurs, we don't expect to issue any common stock in 2015, other than shares under the employee plans, which we estimate to be about $1.2 million. For 2015, we do expect to issue approximately $125 million of long-term debt, in order to maintain an appropriate capital structure and to fund our planned capital expenditures.

We are confirming our 2015 guidance, as Scott said earlier, for consolidated earnings to be in the range of $1.86 to $2.06 per diluted share. Our earnings guidance range previously assumed that we would repurchase 4 million shares of common stock through our 2014 repurchase program by the end of 2014. By not completing that program, and in turn not issuing any stock in 2015, other than those under the employee plans, we'll be slightly over-equitized, and we expect that to cause a dilution of approximately $0.03 in 2015.

We expect Avista Utilities to contribute in the range of $1.81 to $1.95 per diluted share for 2015. As compared to 2014, we expect our 2015 earnings to be positively impacted by a proved recovery of capital -- of costs and capital investments. And in 2015, we expect utility load growth of approximately 1%, and a growth in our O&M expenses of approximately 3%. 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 guidance range for Avista Utilities does not include any benefit or expense under the ERM. In 2015, we expect to be in a benefit position under the ERM, within the 90% customer/10% Company sharing band, which is expected to add 5% to 6% to shares -- $0.05 to $0.06 per share to Avista Utilities' earnings.

Our outlook for Avista Utilities assumes, among other variables, normal precipitation, temperatures, and hydroelectric generation for the remainder of the year, and also includes the expected impact from decoupling in Washington. We estimate that our 2015 Avista Utilities earnings guidance range encompasses a return on equity range of approximately 8.4% at the bottom to 9% at the top of the end range for Avista Utilities. For 2015, we expect AEL&P to contribute in a range of $0.08 to $0.12 per diluted share, and our outlook for AEL&P -- excuse me, also assumes, among other variables, normal precipitation, temperatures, and hydroelectric generation for the remainder of the year.

We expect other businesses to be between a loss of $0.01 and a loss of $0.03 per diluted share in 2015, which includes our costs associated with exploring strategic opportunities. Our guidance generally doesn't include -- or only includes normal operating conditions, and does not include unusual items such as settlement transactions, impairments, or acquisitions or dispositions, until the effects of such are known and certain.

And lastly, I would like to make a few comments about the weather in our service territory. The Pacific Northwest has not had the severe cold that a lot of the US has been experiencing. January and the first half of February have been warmer than normal, which has negatively impacted our heating loads, and we expect the impact of that to be partially mitigated due to the new decoupling mechanism we have in the State of Washington, and our continued cost management. Now, I'll turn the call back over to Jason.

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

(Operator Instructions)

Michael Weinstein, UBS.

Good morning. I was wondering if you could update us or just refresh how the -- your expectations for the accretion for the Alaska acquisition? And also, what is the plan for rate filings there going forward?

With respect to -- updating on accretion, we just came out and actually included that as part of our guidance. We expect to make $0.08 to $0.12 per share from our Alaska Electric Light & Power operations in 2015, and that is just included in our total guidance. When we originally came out with the transaction earlier year, or the middle of last year, we said it would be slightly dilutive for 2014 and slightly accretive for 2015. So what we did is we just said that's included as part of our expectations going forward, and they're $0.08 to $0.12 in our guidance.

Okay. Does that representative a small amount of accretion at least for 2015?

We think we are in line with our expectations when we did the transaction.

Okay thanks. What about the rate plans?

Michael, this is Kelly. We recently took a look at the need for rate relief in Alaska. What it showed was there was very little need in the immediate term, so we'll continue to look at that in the months ahead.

Great. One final question about -- and I know I'm probably taking somebody else's question, but about Salix, I'm wondering if you could update us on strategic opportunities that you are seeing there?

Well, we continue to look -- some, in the last probably four months, oil prices have come down substantially, right? So we're -- a number of counterparties, or a number of parties, as we look at using natural gas with respect to Salix opportunities, with respect opportunities in southeast Alaska to bring natural gas there, and with respect to the Plum Energy investment we have. Everybody is kind of re-evaluating where they are currently in the short term.

We think longer term, we are continuing to look at those opportunities, and believe they have merit for opportunities. So we continue to look at, as we said earlier, the opportunities in -- for generation, for marine fueling or bunkering, and for transportation in the western US or western North America, and we continue to look at those.

We expect to have some further announcement and color throughout -- as we go through 2015 and towards the end of 2015, we expect to be able to make more definitive announcements as to where we are. We continue to look at those and are continuing to be excited about looking at those opportunities.

You would say the impact of falling oil prices has had any kind of effect at all?

Well, it's had an effect because it does impact the change -- the economics. If somebody's going to change from burning diesel to [putting in] LNG, the cost of diesel has come down, so we just have to evaluate that. We still think there's opportunities for that to make sense. It just is we have to do some more evaluation, and our counterparties, the customers, are looking at that as well.

Michael, I would just add that, again, this is obviously a long-term play, so there is some short-term hits to oil prices; I don't think anybody expects them to stay at these levels for the long term. So we are looking at this as a long-term play, and we are still excited about the opportunities to the future.

Great. Thank you very much.

Thanks Mike.

(Operator Instructions)

Paul Ridzon from KeyBanc.

Looking for a quick update on hydro conditions, I know it is still pretty early in the year, but has some of the warmth brought the water down early?

Hi Paul, this is Dennis. Yes, the warmth has accelerated the runoff, so a lot of the lower level snow pack that we have has melted, and as a result our rivers are pretty full for this time of year. However, as of yesterday, the Northwest River Forecast Center had the water supply forecast for April through September on the Clark Fork still at 101%, so still pretty good upper level snow at the Clark Fork. The Spokane River is not so good, it's forecasted at 75%.

Remember, about 75% of our generation annually comes from the Clark Fork, so we still think we are in pretty good shape, especially on the Clark Fork. If we get a normal spring, where we have cool nighttime temperatures, the runoff should come off, or hopefully will come off, in kind of a measured way, which maximizes generations. So if that happens, we should be in pretty good shape.

You said Clark Fork was 101%?

Correct.

So it's looking pretty strong, okay.

Yes.

Thank you very much.

I am showing no questions.

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