Avista Corp (AVA) 2012 Q2 法說會逐字稿

My name is Anne, and I will be your coordinator for today's call. As a reminder, this conference is being recorded for pre-play purposes. At this time, all participants are in a listen only mode.

(Operator Instructions)

I would like to turn the presentation over to your host for today's call, Mr. Jason Lang, Investor Relations Manager. Please proceed, sir.

Thank you, Anne. Good morning, everyone. Welcome to Avista's second quarter 2012 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 Corps 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, and Vice-President, State and Federal Regulation, Kelly Norwood. I would like to reminds 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 2011, and our Form 10-Q for the first quarter of 2012, 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 $0.31 per diluted share for the second quarter of 2012, compared to $0.39 for the second quarter of 2011. On a year to date basis, our consolidated earnings were $0.96 per diluted share for 2012, compared to $1.12 for 2011. Now, I'll turn the discussion over to Scott Morris.

Thank you, Jason, and good morning everyone. Avistas earnings for the second quarter and the first half of 2012 were below our expectation, largely because retail lows were lower than we anticipated. A continued weak economy and operational challenges at such industrial customers resulted in lower retail sales volumes. Based on results for the first half of the year, and a reduction in our forecasts load for the remainder of 2012, we expect our consolidated and utility earnings to be at the lower end of our guidance range for the year. This spring, we had above average precipitation and stream flows, which resulted in strong hydro electric generation in the second quarter, and first half of 2012. In addition, purchase power and natural gas fuel prices are below the level included in base rate. Which ultimately benefited both customers and shareholders.

We continually strive to reduce costs and improve efficiency and productivity in your utility business. The net decrease in other operating expenses was driven by decreased electric maintenance costs which included the regulatory deferral of certain maintenance costs, and reduced outside services partially offset by increased expenses for pension, and post retirement benefits. Results from Ecova, our primary unregulated subsidiary, improved in the second quarter of 2012 as compared to the first quarter of 2012. The cost of completing the acquisitions of Prenova in November 2011 and LPB Energy Management in January of 2012, and the accelerated pace of integrating the companies in the first quarter resulted in a decrease in earnings for the first half of 2012 as compared to 2011. These acquisitions increased Ecovas market share and, excuse me, these acquisitions could increase Ecovas market share and allow Ecova to offer its clients a broader range of services leading to potential future earnings growth.

Ecova revenues continue to grow as it expands its customer base. We expect the business to have strong results in the second half of the year. To maintain service, reliability, and meet the energy needs of our customers, we expect to continue to make significant capital investments in generation transmission and distribution systems. Utility CapEx was $120 million for the first half of 2012, out of a capital budget of $257 million for 2012. We also expect utility CapEx to be about $250 million in each of 2013 and 2014.

We regularly review the need for rate changes in each jurisdiction to improve the recovery of operating costs from capital investments and to provide the opportunity to improve our earned returns as allowed by regulators. As you recall, we filed electric and natural gas general rate cases in Washington in early April. And are planning to fine general rate cases in Idaho in the second half of 2012.

We track three key economic indicators affecting three distinct metropolitan areas in our service area; Spokane, Ft Lane, Idaho and Medford, Oregon. The key indicators are employment change, unemployment rates, and foreclosure rates. We've observed mixed results during the economic recovery. The June 2012 employment indicators are positive, except for Spokane. We have noted that unemployment rates are lower in all three areas and foreclosure rates have decreased compared to prior periods. Our service area economy has been recovering more slowly than the US as a whole. In 2012 we continue to expect economic growth in our service areas to be lower as compared to the United States. And although the economy and lower than expected lows have hurt our 2012 results, we continue to be well positioned for the future. Now, I'd like to turn this present presentation over to Mark.

Thanks, Scott. Good morning, everyone.

For the second quarter of 2012, utility earnings contributed $0.31 better diluted share, which is a decrease from $0.36 in the second quarter of last year. On a year to date basis, utility earns contributed $0.97 per diluted share, a decrease from $1.06 last year. The decrease in quarterly and year to date earnings was primarily during to a decrease in gross margin, and partially due to expected increases in depreciation, amortization, and interest expense. The decrease in gross margin was primarily due to warmer weather. It was also due in part to the continued weak economy, and lower energy usage at certain industrial customers, which we expect to be temporary, that reduce retail loads. These decreases and energy usage were partially offset by general rate increases and a decrease in operating costs.

Heating degree days in Spokane were close to historical average for 2012, but were 21% lower than the second quarter of 2011, and 9% lower than the first half of 2011. For the second quarter of 2012, we recognized the benefit of $1 million under the Energy Recovery Mechanism, compared to an expense of $0.2 million for the second quarter of 2011. For the six months ended June, 2012, we recognized the benefit of $5.1 million under the energy recovery mechanism, compared to $4.7 million in the six months of June last year. We expect the benefit under the arm for the full year of 2012 to be within the 90% customer 10% Company sharing band. This is primarily due to natural gas fuel prices below the amount included in base rates, and as Scott mentioned, the above normal hydroelectric generation.

Ecovas year to date revenues increased $18.1 million as compared to the first half of 2011 and totaled $77.1 million. The acquisitions of Prenova and LPB added $11.6 million to operating revenues for the first half of 2012. Although revenue growth was lower than we expected for the first half of the year, we expect to see growth in the second half of year similar to the organic growth rate that we reported in 2011. The $25 million increase in total operating expenses for Ecova reflects primarily the increased costs necessary to drive and support ongoing and future business growth, as well as to support the increased revenue volume obtained through the acquisitions. In addition, Ecova incurred $1.5 million in transaction and immigration related costs.

Depreciation and amortization increased $2.9 million for the first half of 2012, due to intangibles and other long live assets recorded in connection with the acquisitions. Ecovas $60 million committed line of credit was fully utilized as of June 30th. In July, Ecova entered into a new five-year, $125 million committed line of credit, with various financial institutions, replacing its $60 million committed line of credit. The previous owners of Cadence network, a company acquired by Ecova in 2008 had a right to have their shares Ecova common stock redeemed by Ecova during July 2011, or July of 2012. These redemption rights were not exercised and expired effective July 31, 2012.

The net loss from our other businesses was $1 million for the second quarter, and $1.3 million for the first half of 2012. The decline in results from 2011 was primarily due to increased litigation costs for the remaining contracts in previous operations of Avista Energy as well as a net loss on investments. Earnings from Metal FX were $0.8 million for each of the six months ended June 30, 2012 and 2011. Losses on venture fund investments were $0.5 million for the six month ended June 30, 2012, compared to less than the $1.1 million in 2011. As of June 30th, we had $284 million of available liquidity under our $400 million committed line of credit with $91 million of borrowings, and $25 million in letters of credit outstanding.

In June, 2012, we entered into a bond purchase agreement with certain institutional investors in the private placement market, for the purpose of issuing $80 million of 4.23% first mortgage bonds, due in 2047. Th issuance of the bonds will occur at closing in November of 2012. In connection with the pricing of the bonds, we cash settled interest rates swap contract with a notional amount of $75 million, and paid a total of $18.5 million. Upon settlement of the interest rates swaps, regulatory asset or liability is amortized as a component of interest expense over the life of the forecasted interest payments. We expect to issue up to $45 million of common stock in 2012, in order to maintain a prudent capital structure. We issued $3.6 million in the first half of the year. Additional shares are expected to be issued under a periodic offering program as well as the dividends reinvestment and direct stock purchase plan and employee plan.

I would like to talk a little bit about guidance. We expect our 2012 consolidated earnings to be at the lower end of our guidance range of $1.65 to $1.85 per diluted share. We experienced lower than expected retail loads during the first half of 2012, and we reduced our forecasted loads for the remainder of the year. We estimate that the reduction in our loads from our original expectations will reduce our 2012 earnings per share by approximately $0.10 to $0.12. We expect Avista Utilities to be contribute at the lower end of the range of $1.51 to $1.66 per diluted share for 2012, which includes, a benefit under the earn in 2012 within the 90% customer, 10% company sharing bank.

It is important to note that the forecast of our position in the energy recovery mechanism can vary significantly due to a variety of factors, including the level of hydroelectric generation, and retail loads, as well as changes in purchase power, and natural gas fuel prices. Our outlook for Avista Utility assumes, among other variables, normal precipitation, and temperatures for the remainder of 2012. We continue to expect Ecova to contribute in the range of $0.16 to $0.19 per diluted share for 2012 and the other businesses to be between a break even and loss of $0.022 per diluted share. Now I'll turn the call back over to Jason.

Thanks, Mark Now we will open this call for questions.

(Operator Instructions)

Our first question comes from the line of Michael Klein, with Sidoti and Company. Please proceed.

Good morning, guys. Just, on the guidance, what gives you confidence you can hit your guidance range at Ecova? It implies a pretty significant jump in the back half.

You're correct, we made $0.01 per share in our guidance is $0.16 to $0.19. A lot of that has to do with the timing -- the timing of the revenues as certain of their programs tend to be later in the year, and we do expect to have more significant revenue growth in the second half of the year as compared to the first half of the year, and we believe we'll be able to be in our guidance range.

Okay. And in terms of costs at Ecova, are those expected to wind down in the back half of the year as well? Or is the earns guidance driven mainly by revenue?

The guidance is primarily driven by revenue, the costs we did incur in the first quarter an acceleration of certain integration costs, but we continue to work with that integration, that's not, it's not completed as of the first quarter, but we had an acceleration of costs so we expect some costs to continue to be incurred, but it's largely driven more by revenue growth in the second half of the year.

And given the costs and the revenue ramp, right now, that we're expecting, when do you expect to hit a normalized high run rate? Do you think we'll exit 2012 kind of on a run rate we can expect in as a harbinger for future growth going forward, or is that still a little early?

I think as we look, you know, when we get through 2012, again the acquisitions occurred in November of last year as well as January of this year. So we'll have almost a complete year of both of those acquisitions. By the end of the year, we should have a pretty good sense of what our revenues are, and then we would expect to continue to have organic revenue growth because of the position we have. We think there's a lot of runway left to continue to grow our business organically, as well as we will continue to look for potential acquisitions if they fit and add to our business as we have it today, and we've done that for the past several years.

Sure, okay. And last question, switching over to the utility, you said it's some operational challenges at industrial customers. Does that imply they maybe a one-time event? Is it more temporary, or is this maybe something of a more permanent nature?

Yes, Mike, I would just -- for example, we had a large silver mine in north Idaho that had to close down for some safety reasons, but are starting to ramp up again and have been able to -- have been cleared, so we expect to have [Hecklick] come back so that's a great example. We currently have a large paper manufacturer that has had some machine problems, and motor problems. They are fixing that. It just takes some time for them to get new equipment. Yes, the industrial loads on those two examples are temporary.

Okay. Great. Thanks a lot.

Thank you, Mike.

The next question comes from the line of Paul Ridzon, with KeyBanc. Please proceed.

First part of my question. Are those two customers the biggest drag?

Biggest, excuse me, the biggest drag for the results? No, they are a portion of the drag. The overall economy is probably the biggest drag of it, you know, overall our results across commercial and industrial loads were more than those customers. Those customers probably represented, I don't know, 20% to 30% of our drag. I mean, that's a meaningful number, but it's not the majority. The majority is the overall economy is slower than what our expectations were and we have -- we've seen the results in the first half, and we've also changed our forecast to look forward and we expect that to continue. It's just not recovering as fast.

Okay. And then secondly, in the commentary about the utility, you said that operating costs were down, when I look at the consolidating statement, all their operating costs seem to be up. Is that all that Ecova?

Yes, that would be the difference. And that's largely due to the -- some growth -- to growth and operating costs to prepare for the additional revenue and the acquisitions that we did last year and the beginning of this year.

How much of that is in accelerations of costs as opposed to what we expect to be a normal run rate?

Well, what we said the transactional cost was the $1.5 million related to -- in the first quarter related to that, and that's the only number that we've given out. The rest are just part of the costs as part of their business.

But the goodwill amortization shows up in depreciation, correct?

Correct, and yes, it does.

Okay. Thank you very much.

Thanks, Paul.

Our next question comes from the line of Brian Russo with Ladenburg Thalmann. Please proceed.

Hi, good morning. Could you break down the EPS variance between weather and the slow down or operational issues in industrial sales or the economy?

Well, what we have said is, really, for -- from a quarter over quarter perspective, we are down -- or year over year perspective, we are down about 9% on -- from weather from a degree day perspective, but really, it was close to normal on our forecast, we try to include normal. Most of our issue for the year and going forward for the outlook for guidance is related to the economy, and the operational challenges that we had at certain customers as Scott described. So we said specifically in our guidance $0.10 to $0.12 is what that impact is. That includes six months to date and our forecasted expectations of continued weakness.

Could you update us on what your updated load forecast is for the rest of the year?

It's about half of what that expectation is. Little less than half of that expectation that we incurred already.

Okay. And can you remind us, the changes in your load forecast, can that be captured in this pending Washington rate case, and thus, won't contribute to any sort of, you know, under recovery or lag when new rates go into effect in early 2013?

Brian, this is Kelly Norwood, in our original filing, we included, as you probable have seen, an attrition adjustment. Part of that attrition adjustment is to reflect the expected loads during the future rate year, which is 2013. Since we've recently revised our load forecast, we actually did modify our attrition adjustment, and we've provided that information to all parties, so I will say there's opportunity to reflect it, there's no guarantee, but it certainly, before all the parties and we will certainly make sure that it is viewed by the commission and considered as part of the end result.

Okay. So part of the attrition adjustment is -- reflects the load forecast in '13 as well as the post test year net plan additions?

That's correct, and essentially what your doings with an attrition adjustment is taking a look at your growth in net plant investment or rate base, your growth and your expenses and then compare that to your growth in loads. And if your growth in loads lower, you'll have a high attrition adjustment.

This is a one time only event? You would have to refile in your next rate case to keep this ongoing, or is this something that could be permanent?

It could be permanent, but our proposal at this point is to address it in this case. We would need to propose it again in the next case.

The historical test year and the regulatory lag attributable to that, that is currently about 60 to 80 basis points?

Yes, it's in that neighborhood, 60 to 80, 70 to 90, somewhere in that neighborhood.

Okay. And is there precedent for this? Maybe you can put it into context as to how staff or, you know, the commission might view this? Maybe, add some color to that.

Sure. We actually had attrition adjustments for our company back in the '80s, and in fact, in a Washington commission policy statement that came out in December of 2010, the commission noted that an attrition adjustment may be appropriate to consider. And then the Washington staff in their testimony in the Puget case also suggested that an attrition adjustment may be the solution to addressing the lag issue. So, that's what is in front of us now, and we're hopeful that the commission will approve some attrition adjustment.

And we're awaiting staff in your general rate case, correct?

That's correct. Their testimony is due September 19th.

Okay. That's very helpful. And just moving, or changing gears to Ecova -- remind us of the current appraisal value, I think this the March 10-Q, the appraisal value of the 20.8% minority interest was $44.3 million. I suppose that might be higher with some of the recent acquisitions if you were to re-appraise it, and does that get re-appraised quarterly?

We do put in, and this will actually be the last quarter we do that, in our 10-Q, which we'll file today, we'll have a listing of what it was as of June 30, but then after that, that put right goes away as we talked about. The redemption rights expired on exercise, so we won't see that. The acquisitions though, typically they wait a year before that gets, you mean, from a purchase price very value creation, they wait a year to determine what that impact was, so we didn't expect to see that until next year.

Brian, I would add, while I can't speak for our minority partner, I think it's a great indicator of our minority partner's confidence in this business that they have not exercised their put right and feel optimistic about the future. We think that the company really has an opportunity to continue to grow, and while there is a hockey stick with the revenues in the second half of the year, I would like to remind people that when we do book new clients, bookings have been strong, and it that does take a month or two or three off to get the clients kind of situated and online and into the system. So once we sign somebody, there is a little bit of a lag from the signing into actually driving revenues, so that's why we -- the second half of the year is going to be stronger than the first half.

And in terms of the long term strategic plan, you mentioned in the Qs and the Ks that you might look to monetize it, or take it public. Just wondering, you guys have bolted on quite a number of acquisitions you're going to be well north of $100 million in sales. Just want to get a sense for what the long term strategy is for Ecova.

You know, Brian, we still are so confident about this business, we continue to see significant up, you know, upside to this business. We continue to add more products, more services, there's more demand for the product. We're beginning to see opportunities, not just in the commercial industrial side but our utility business is quite strong. Given all of that, we're going to continue to he invest in the business, we're going to continue to drive organic growth as Mark mentioned. And really, any kind of a monetization strategy is going to be, if we do one, is going to be timed and we can maximize shareholder value, so I really can't give you a time frame. What I am telling you is that because we see the runway and because we see some good upside, we're going to continue to do everything we can do to support that business to maximize shareholder value. And the timing really becomes in our opinion, secondary to making sure that we keep this business viable and growing.

Okay. Thank you very much.

Our next question comes from the line of Eric McCarthy with Praesidis Advisors.

My question was asked and answered. Thank you.

Thanks, Eric.

Our next question comes from the line of Chris Ellinghaus with Williams Capital.

Hey, Mark. Can you give us anymore color on the seasonality that you are expecting out of Ecova going forward?

I don't know it's as much seasonality as there's a couple things. We added a few companies and we are integrating those companies and then trying to grow organically as we added new clients. Part of that, as Scott said, we continue to have additional bookings and we continue to see strength there but it takes time to get that to revenue growth. And there are some, in certain of the programs in the utility space, that portion of the business that tend to ramp up historically over the second half of the year and largely a lot of it even occurs in the fourth quarter, so we expect to see that again. We continue to see strength in that business, and historically, we have seen the growth in the fourth quarter, and we continue to expect that.

Okay. Can you quantify at all with your off-line industrial customers meant in the first and second quarter?

What I indicated was our $0.10 to $0.12, it was about 20% to 30% of that. Our expectation. That's as close of a quantification as I'm comfortable.

Okay. And I'm sorry, I missed this. What did you say about the earn for the second quarter?

It was $1 million, I believe.

And what did that bring you to for the year to date?

$5.7 million.

Okay. Great. Thanks a bunch.

Thanks.

(Operator Instructions)

Our next question comes from the line of James Bellessa with D.A. Davidson. Please proceed.

Good morning. When you set your 2012 EPS guidance range of $1.65 to $1.85, you assume some type of load and now you're saying of that load for 2012 is lower than you planned, and you're saying that earnings dragged from the lower load is $0.10 to $0.12. How much of that was the first half -- of the $0.10 to $0.12, how much is the first half?

Jim, what I said before was it was just a little less than half.

Very good. Thank you very much.

Thanks, Jim.

Operator. Ladies and gentlemen, with no further questions, this concludes today's question and answer session. I would now like to turn the call back to Mr. Jason Lang for closing remarks.

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

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.