Avista Corp. Q4 2008 Earnings Call Transcript

Feb.18.09 | About: Avista Corporation (AVA)

Avista Corp. (NYSE:AVA)

Q4 2008 Earnings Call

February 18, 2009 10:30 am ET

Executives

Jason Lang – Manager, Investor Relations

Scott Morris – Chairman, President and Chief Executive Officer

Malyn Malquist – Executive Vice President

Mark Thies – Senior Vice President and Chief Financial Officer

Kelly Norwood – Vice President, Regulatory Affairs

Christy Burmeister-Smith – Vice President, Controller and Principal Accounting Officer

Analysts

Paul Ridzon – Keybanc Capital Markets

Brian Russo – Ladenburg Thalmann

James Bellessa – D.A. Davidson & Company

Hasan Doza – Luminus Management

Chris Shelton – Millennium Partners

Patrick McGlinchey – Sidoti & Company

Operator

Good day, ladies and gentlemen and welcome to the fourth quarter 2008 Avista Corporation earnings conference call. My name is Erica and I will be your coordinator for today. (Operator Instructions) I would now like to turn the presentation over to your host for today's call, Mr. Jason Lang, Investor Relations Manager. You may proceed, sir.

Jason Lang

Thank you, Erica. Good morning everyone and welcome to Avista's fourth quarter and fiscal year 2008 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; Executive Vice President Malyn Malquist; Senior Vice President and CFO Mark Thies; Vice President of Finance and Treasurer, Ann Wilson; Vice President State and Federal Regulation, Kelly Norwood; Vice President, Controller and Principal Accounting Officer Christy Burmeister-Smith; and the President and CEO at Advantage IQ, Stu Stiles.

Before we begin, I'd like to remind you that some of the statements that will be made today are forward-looking statements that involve risks and uncertainties which are subject to change. A reference to the various factors which could cause actual results to differ materially from those discussed in today's call, I will direct you to our Form 10-K 2007 and Form 10-Q for the quarter ended September 30, 2008, which are available on our website.

To begin this presentation I would like to recap the financial results presented in today's press release. For the fourth quarter of 2008, our consolidated net income was $0.32 per diluted share compared to net income of $0.26 per diluted share for the fourth quarter of 2007. For the year ended December 31, 2008, our earnings were $1.36 per diluted share compared to $0.72 per diluted share for the year ended December 31, 2007.

Now I'll turn the discussion over to Avista's Chairman of the Board, President and Chief Executive Officer, Scott Morris.

Scott Morris

Thank you, Jason, and good morning everyone. Overall, we are pleased with our results for the fourth quarter and year ended December 31, 2008. We expect continued improvement in our financial results in 2009 due to the implementation of a general rate increase in Idaho that became effective October 1st and the implementation of a general rate increase in Washington effective January 1, 2009.

A previous general rate increase in Washington implemented at the beginning of 2008 partially contributed to the improvement in our utility results as well as lower interest costs. Avista Utilities also had weak earnings in 2007. In addition to the improvement at the utility, our consolidated results improved as compared to 2007, which were lower due to the net loss at Avista Energy in 2007.

Despite a good winter snow pack in early 2008 the late spring runoff resulted in excess water being spilled which yielded lower than normal hydroelectric generation for the first half of the year. Purchase power costs were higher than expected due in part to colder than normal temperatures starting the first quarter heating season and an increase in the price of wholesale power. Therefore, for fiscal year 2008 we absorbed $7.4 million of costs under the energy recovery mechanism in Washington compared to $8.5 million in 2007.

Also contributing to the increase and net income for 2008 was $5.7 million of interest income related to the company's 2001 through 2003 tax years and the resulting refund received from the Internal Revenue Service, which included the settlement of the indirect overhead cost issue. This was partially offset by $1.4 million of interest expense related to 2004 and 2005 tax years. Both amounts were recorded during the third quarter of 2008.

As approved by the Idaho Public Utility Commission electric rates for Idaho customers increased by 12% and natural gas rates increased by 4.7% effective October 1st. Combined, these rate changes are designed to increase annual revenues by $27.1 million. Effective January 6, 2009 natural gas rates decreased 4.7% in Idaho reflect an adjustment to the purchase gas adjustment mechanism, a decrease in 2009 revenues of $3.1 million. As you know PGAs are designed to pass through changes in natural gas costs to our customers with no change in gross margin or net income.

As approved by the Washington Utilities and Transportation Commission base electric rates for Washington customers increased by an average of 9.1%, base natural gas rates increased by an average of 2.4% effective on January 1, 2009. Combined, these rate changes are designed to increase annual revenues by $37.3 million.

In January 2009, the Office of Public Counsel filed a petition for judicial review of the Washington Commission's recent order approving the company's multi-party settlement. Public Counsel raised a number of issues that were previously argued before the Commission. The appeal itself does not prevent the new rates continuing to be in effect.

The appeals process may take several months and a decision is not expected until later this year. The settlement agreement approved by the Washington Commission was supported by the Commission staff and other parties including the low income advocacy group. New rates were approved by the Commission only after a thorough ten-month review by all parties of all the issues presented in the case.

We believe the Commission's decision approving the settlement was based on sound and sufficient evidence and was consistent with the law. The Court will either affirm the decision of the Washington Commission in its entirety or reverse the decision in whole or in part and remand the matter back to the Commission for possible refund. Also, effective January 16, 2009, natural gas rates decreased 3% in Washington's reflect an adjustment to the purchase gas adjustment mechanism, a decrease in 2009 revenues of $4.2 million.

As we continue to invest in the growth and upgrade of our Company's generation, transmission and distribution infrastructure, we will continue the timely filing of general rate cases to recover our cost of doing business and to more closely align our rates of return with those allowed by regulators.

At the same time, we understand these are tough economic times and we are diligently managing our operating costs and finding addition efficiencies to help reduce costs. Such cost saving measures include but are not limited to officers foregoing salary increases in 2009 and canceling plans to construct additional office space, instead purchasing an existing office building for a savings over $9 million in capital construction costs.

In January 2009, we filed requests for additional general rate increases in both Washington and Idaho. In the Washington general rate case filing, we have requested a net electric rate increase of 8.6%. The net electric rate increase is based on our requested 16% increase in billed rates with an offsetting 7.4% reduction in the current ERM surcharge.

We're also requesting a 2.4% increase in natural gas rates. The filing is designed to increase annual base electric revenues by $69.8 million, $37.5 million net after considering the reduction in the current ERM surcharge, and increase annual natural gas service revenues by $4.9 million. Our request is based on a proposed rate of return on the rate base of 8.68% with a common equity ratio of 47.5% and an 11% return on equity.

In the Idaho general rate case filing, we have requested a net electric rate increase of 7.8%. A net electric rate increase is based on a requested 12.8% increase in billed rates with an offsetting 5% reduction in the current power cost adjustment surcharge. We're also requesting a 3% increase in natural gas rates. The filing is designed to increase annual base electric service revenues by $31.2 million, $18.9 million net after considering the reduction in the current PCA surcharge, and increase annual natural gas service revenues by $2.7 million.

Our request is based on a proposed rate of return on the rate base of 8.8% with a common equity ratio of 50% and an 11% return on equity. The Washington Commission has up to 11 months and the Idaho Commission has up to seven months to review the respective filings.

Requested electric rate increases in both states are primarily driven by increased power supply costs due to the expiration of low cost contracts, an increase in retail load, investments made to expand and upgrade the company's generating resources and other facilities and the cost to comply with environmental and legal requirements associated with relicensing the Spokane River hydroelectric facilities and compensations of the Coeur d'Alene Tribe

The cost for generating and purchasing power have increased over the last year, due in part to the need to replace expiring low cost power contracts and to acquire new resources to serve customer energy needs. I would like to make a few more comments about our settlement with the Coeur d'Alene Tribe. In December we reached a comprehensive agreement with the tribe over business over Avista's past and future use of the tribal lands and water in the operations of our Spokane River hydroelectric projects including the Post Falls dam.

The settlement is the result of a collaborate effort by the tribe, United States Department of Interior and Avista. This represents a major step in relicensing of our Spokane River hydro projects. Pursuant to the settlement we will compensate the tribe a total of $39 million for past storage of water from the period from 1907 through 2007. We paid $25 million in December 2008 with remaining payments of $10 million in 2009 and $4 million in 2010.

We will compensate the tribe for future storage of water through payments of $400,000 per year beginning in 2008 and continuing through the first 20 years of a new license, and $700,000 per year through the remaining term of the license.

In addition to past and future storage payments the agreement provides for annual payments to fund a variety of protection, mitigation and enhancement measures on the Coeur d'Alene reservation that will be implemented over the life of the new FERC license.

This will be accomplished through the creation of a Coeur d'Alene resource protection trust fund. Annual payments from Avista to the trust fund for protection mitigation and enhancement measurements would commence with the issuance of a new FERC license and are expected to total approximately $100 million over an assumed 50-year license term. Overall we’re very pleased to be resolving these longstanding resource issues that are so important to our region; we highly value our continuing partnership with the Coeur d'Alene Tribe.

I’d also like to comment about the economy and our service territory. Over the last several years our regional economies taken as a whole have grown faster than the nation when measured by job and population growth. Although our service territory appears to be faring better than certain other parts of the country we’re not immune from the turbulence affecting the national and international economy financial markets.

We’re observing modest declines in employment throughout our service area due to cut backs in the construction, forest products, mining and manufacturing sectors; however, agriculture, health care, higher education, and governmental sectors continue to perform well.

Overall nonfarm employment contraction form 2007 to 2008 was 2.3% in Spokane, 4.1% in Coeur d’ Alone and 2.1% in Medford compared to the national average of 2.1%. Unemployment rates are much higher than a year ago having moved above the national average in our eastern Washington, northern Idaho and southern Oregon service areas. The unemployment rate for December was 7.6% in Spokane, 7.3% in Coeur d'Alene and 9.9% in Medford, compared to the national average of 7.2%.

The housing market has remained relatively balanced with stable prices keeping foreclosures in check. The foreclosure rates in Spokane, Coeur d'Alene and Medford were all below one half of a percent in 2008, compared to the national average of 1.85%.

Now I’d like to turn this presentation over to Mark Thies. Mark will provide a review of our capital budget, further details on the performance of Avista utilities, liquidity and our financing activities.

Mark Thies

Thanks, Scott and good morning everyone. For 2008 our capital expenditures were approximately $220 million. Our capital expenditures are expected to be approximately $210 million in 2009 and 2010. And we expect our rate base to grow by 5 to 7% per year in 2009, 2010 and 2011. We are planning to upgrade certain hydro projects and we will continue to enhance our natural gas and electric distribution system.

The second quarter of 2008 we completed the acquisition of a wind generation site. We expect to construct a 50 megawatt generation facility at an estimated cost of over $125 million. To help reduce cost and resulting rate pressure we have recently decided to delay this project until 2013. The delay is partially because of the company’s ability to meet its renewable resource requirements and growing customer demand with ongoing upgrades at the company’s hydroelectric facilities and by acquiring renewable energy credits.

We remain committed to the project but believe that the current economic environment warrants pushing the project out a few years. As we mentioned in the third quarter call, we are participating in planning activities for the development of a proposed 3,000 megawatt transmission project that would extend from British Columbia, Canada to northern California. Other participants include Pacific Gas and Electric Company, Pacific Corp. and British Columbia Transmission Corporation.

We have executed an agreement with the other participants in order to perform preliminary studies and assessments for the project including electrical system studies and resource mapping of possible transmission line corridors. Under the agreement we have committed to contribute $600,000 or 12% of the total preliminary cost of the project.

Avista utilities contributed $0.33 per diluted share for the fourth quarter 2008 compared to $0.23 per diluted share for the fourth quarter of last year. For the full year of 2008 our utility operation contributed $1.30 per diluted share, a significant improvement from $0.82 per diluted share in 2007.

As Scott mentioned the improvement in results was partially due to the Washington general rate case implementation at the beginning of 2008, as well as the implementation of the Idaho general rate case effective October 1st. In addition there was a slight increase in energy usage by our customers, primarily as a result of colder during the first quarter 2008.

Utility revenues increase $284 million as a result of increases in natural gas revenues of $157 million and electric revenues $127 million. The increase in natural gas revenues primarily the result of increased wholesale revenues. Wholesale natural gas sales reflect a balancing of loads and resources and the sales of resources in excess of load requirements as part of the natural gas procurement process.

Variances between the revenues and cost of the sale of resources in excess of load requirements are accounted for the PGA mechanism and do not have a significant effect on net income. The increase for 2008 was primarily a result of increased volumes and the optimization of underutilized interstate pipeline transportation and natural gas storage assets as we continue to look for ways to keep customer costs down.

The increase in electric revenues was primarily due to increased retail revenues of $59 million, wholesale revenues of $36 million and sales of fuel of $32 million. The increase in wholesale revenues and sales of fuel reflect an increase in electric resource optimization activities. The increase in utility net income for both the fourth quarter and full year of 2008 was also partially due to a decrease in interest expense.

Decrease in interest expense was due to refinancing maturing higher cost debt with lower cost debt issuance. The increase in utility net income was also due to the impairment of a turbine of $2.3 million as well as the disallowance of $3.8 million of unamortized debt purchase cost, both of which were recorded third quarter of 2007.

Utility other operating expenses increase $7.8 million for 2008 as compared to 2007. This was primarily due to an increase of $4 million in electric generation, operation and maintenance expenses as well as a $3.4 million increase in electric distribution expenses.

We are committed in maintaining adequate liquidity and will continue to utilize cash flows from operations, long-term debt and common stock issuances to fund our capital expenditures and maturing debt. And use short term debt for these purposes on an interim basis. Two thousand eight, debt maturities were $404 million, the majority being $273 million of a 9.75% unsecured senior notes that matured in June 2008.

In 2008, we issued $250 million of 5.95% first mortgage bonds to fund a significant portion of this debt that matured. In December 2008, we issued $30 million of 7.25% first mortgage bonds due in 2013 and refinanced $17 million of pollution control bonds.

The proceeds from the $30 million issuance together with funds borrowed under the $320 million committed line of credit were used to fund $25 million of medium term notes that matured in December 2008 and to purchase $66.7 million of pollution control bonds in December 2008 and we will hold until refunded at a later date. We had $250 million of cash borrowings and $24.3 million in letters of credit outstanding as of December 31, 2008 under our $320 million committed line of credit.

In November 2008 we entered into a new committed line of credit in the amount of $200 million that expires in November 2009. We had no borrowings outstanding at the end of 2008 under this committed line of credit.

We sold $17 million of accounts receivable under our $85 million revolving accounts receivable sales facility as of December 31, 2008 and as of the end of the year we had a combined $313.7 million of available liquidity under our $320 million committed line of credit, $200 million committed line of credit and $85 million revolving accounts receivable sales facility.

We have a sales agency agreement to issue up to 2 million shares of common stock from time to time. We issued 750,000 shares and received net proceeds of $16.6 million in the third quarter of 2008. We will continue to evaluate issuing common stock and may issue common stock in future periods.

Due to market conditions and the decline in the fair value of pension plan assets we are planning to contribute $48 million to the pension plan in 2009, a significant increase compared to the $28 million we contributed in 2008 and the $15 million we contributed in both 2007 and 2006. We have adequate liquidity to meet our pension plan funding obligations for 2009.

Now I'll turn this presentation over to Stu Stiles to review the operations of Advantage IQ.

Stuart Stiles

Thanks, Mark and good morning. Advantage IQ's net income for the fourth quarter and fiscal year 2008 were slightly below the comparable periods of 2007. This was primarily due to the increase in our ownership percentage in the business as a result of the acquisition of Cadence Network, effective July 2, 2008 and the amortization of intangible assets related to the Cadence acquisition. However, our contribution of $0.11 per diluted share still met our expectations for 2008.

For 2008 total revenues increased 25% from service revenues that increased 40%, partially offset by a 37% decrease in interest revenue. In 2008 we processed bills totaling $60.7 billion, an increase of $4.2 billion or 34% as compared to 2007. The addition of Cadence Network added $2.1 billion in energy dollars managed for 2008.

During 2009 we are expecting slower internal growth than had been expected as some of our customers are experiencing bankruptcies and store closures in these tough economic times. Additionally, interest revenue is expected to be lower in 2009 due to the historic low short-term interest rate environment that we are currently experiencing and that is expected to continue throughout 2009.

However, the overall services provided by Advantage IQ are considered valuable to current and potential customers as Advantage IQ is able to assist them in reducing costs in these difficult economic times. We are pleased with the way the business has started in 2009.

Our parent company plans to monetize at least a portion of its investment in Advantage IQ during the next two to four years. The potential monetization could be contemplated through an initial public offering or sale of the business depending on future market conditions, growth of the business and other factors.

Under the transaction agreement the previous owners of Cadence Network can exercise the right to redeem their shares of Advantage IQ stock during July, 2011 or July, 2012 if Advantage IQ is not monetized through either an initial public offering or sale of the business to a third party. Their redemption rights expire on July 31, 2012. The redemption price would be determined based on the fair market value of Advantage IQ at the time of the redemption election as determined by certain independent parties.

The consolidation of the two companies continues to go very well. We have met all major integration milestones and have substantially met financial goals with the combined companies. Therefore, we remain optimistic about the future of the business.

Now, I'll turn this presentation back over to Mark Thies to review our other businesses, dividend information and earnings guidance.

Mark Thies

Thanks, Stu. In other business for 2008 our results improved over 2007 primarily because of the net loss from Avista Energy in the prior year. The remaining activities of Avista Energy are no longer a reportable business segment and are included in other for segment reporting purposes. The fourth quarter of 2008 we absorbed some market losses on venture fund investments due to overall economic conditions and we incurred some litigation costs. These were the primary drivers of the net loss of $2.2 million in our other businesses.

Over time as opportunities arise we plan to dispose of assets and phase out operations that do not fit with our overall corporate strategy. However, we may invest incremental funds to protect our existing investments and invest in new businesses that fit with our overall corporate strategy.

As we have indicated in past calls management intends to recommend that the board consider gradually increasing the dividend pay out ratio to become more in line with the average pay out ratio for the utility industry which is currently approximately 60% to 70% of earnings. The board considers the level of dividends on a regular basis, taking into account numerous factors including financial results, business strategies and economic and competitive conditions.

The declaration of dividends is within the sole discretion of the board. Last week the board approved a quarterly dividend of $0.18 per share. We are confirming our 2009 guidance for consolidated earnings to be in the range of $1.40 to $1.60 per diluted share.

We expect Avista Utilities to contribute in the range of $1.30 to $1.45 per diluted share for 2009. Our outlook for Avista Utilities assumes among other variables normal precipitation, temperatures and hydroelectric generation. We expect Advantage IQ to contribute in the range of $0.12 to $0.14 per diluted share and the other businesses to be between a loss of $0.02 and a contribution of $0.01 per diluted share.

The recent general rate increases implemented in Idaho and Washington are expected to provide incremental progress in recovery of utility costs. However, we will still experience regulatory lag in 2009. Even though we fined new general rate cases in both Washington and Idaho in January, 2009, we expect this regulatory lag to continue.

This lag is driven in part by a delay in recovery of incremental capital investments and increased operation and maintenance and administrative and general expenses caused by an increasing cost environment. The current regulatory process does not provide timely recovery of these costs, which is currently estimated to impact return on equity in the range of 60 to 80 basis points. However, we plan to continue working with regulators to reduce regulatory lag.

In addition there are certain other costs that are not recovered in retail rates that impact return on equity by approximately 70 to 90 basis points. These costs include expenses such as executive incentive and supplemental retirement compensation, dues and charitable donations, amortization of premium related to the Oregon natural gas properties and a portion of advertising.

During 2009 we are anticipating slower internal growth at Advantage IQ and lower interest revenue as Stu mentioned; however, the overall services provided by Advantage IQ are considered valuable to current and potential customers of Advantage IQ, and Advantage IQ is able to assist them in reducing costs in these difficult economic times.

Now, I'll turn this presentation back over to Scott Morris.

Scott Morris

Thank you, Mark. Last Friday Malyn Malquist announced that he will retire from the company effective March 31st. Malyn has been an invaluable member of our senior leadership team since 2002. As you know Malyn was our CFO from 2002 through September 2008.

His extensive background in the utility sector finance and management has been instrumental in strengthening our company's financial health and helping us attain important goals including regaining our investment grade credit rating.

We greatly appreciate it Malyn's knowledgeable insight, his leadership and his service to our stakeholders. I also appreciate all of Malyn's efforts and commitment to assure that the CFO transition went very smoothly. Now, I would like to turn the call over to Malyn.

Malyn Malquist

Well thanks, Scott, for your kind words. Good morning everyone. You can't see me but I am smiling quite broadly this morning. Most of you know that we've been planning for my retirement for the past year. Well, actually I have been planning for this for over 30 years.

We've worked to have a very smooth transition from my tenure as a company CFO to Mark Thies our new CFO. This is now complete. Mark is doing a great job and has proven to all of us that we made a wise choice. So it's time for me to move on to the next phase of my life.

I want to thank everyone at Avista for giving me the opportunity to be a part of this fine team. I particularly appreciate [Gary Healy] for not taking no for an answer in 2001 and 2002 as he spent a year trying to convince [Georgia] and me to leave Reno.

The officers and employees of Avista are outstanding professionals. I appreciate the support they've given me as well as the constant support that I have received from our Board of Directors. I have enjoyed my time here immensely.

One of my favorite parts of my job has been working with the financial community. I appreciate the support and the opportunity to work with many analysts and bankers whom I have come to know over the past 30 years. I want to wish each of you continued success and all the best in your careers and in your personal life's. Thank you for all that you've done for me.

Now, I would like to turn the call back over to Jason.

Jason Lang

Thanks, Malyn. Now, we'll open this call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Paul Ridzon – Keybanc.

Paul Ridzon – Keybanc Capital Markets

I had a few questions. First, what's the embedded price of natural gas in your Washington electric rates?

Mark Thies

Currently the embedded costs in existing rates is $8.30 per dekatherm for the unhedged portion.

Paul Ridzon – Keybanc Capital Markets

And that will change with the next rate order?

Mark Thies

Yes, it will.

Paul Ridzon – Keybanc Capital Markets

What's the current, I know it can change pretty quickly, but what are you seeing as far as the snow pack?

Scott Morris

Paul, right now snow pack is a little bit below normal. We caught up but it's been dry. However, I think a couple of things to remember about that. You're right, it can catch up pretty quickly. I think if we get normal precipitation we're not too worried.

The other thing to remember is that natural gas prices are quite low right now as you know and wholesale power prices are very low for the region. So overall I like our position.

Paul Ridzon – Keybanc Capital Markets

Are you aggressively trying to lock in some of that, those low prices?

Scott Morris

We are aggressively executing our hedging strategies and yes, we are making some purchases to take advantage of the market.

Paul Ridzon – Keybanc Capital Markets

And just at in the fourth quarter other segment had a kind of a wide swing of $0.04 can you just give a little more detail about what happened with these venture funds and litigation?

Scott Morris

Well the venture funds they're small investments that we have and we mark those to market and as the economy has come off significantly in the fourth quarter their performance, well actually throughout 2008, their performance had suffered and so we did take impairment about half of that amount was related to a couple of the venture fund investments that we have.

The other side of the litigation, we don’t really comment on ongoing litigation. We had some litigation costs related to one of our subsidiaries and we incurred those costs of about $1 million in the fourth quarter.

Paul Ridzon – Keybanc Capital Markets

And just – you gave your Washington and Idaho rate case parameters. What was the rate base in each of those jurisdictions you filed for?

Mark Thies

I don’t have the exact rate base numbers. We may have to circle back on that.

Paul Ridzon – Keybanc Capital Markets

And then the 150 basis points of potential under earning you kind of highlighted for the various reasons, what is that in the net income?

Scott Morris

Again he's looking at the rate base and the equity. We have approximately $1 billion of equity.

Paul Ridzon – Keybanc Capital Markets

Okay. That's…

Scott Morris

So from a return on equity perspective you can do the math on that.

Paul Ridzon – Keybanc Capital Markets

I'll jump back in queue with some further questions. Thank you.

Operator

Your next question comes from Brian Russo – Ladenburg Thalmann.

Brian Russo – Ladenburg Thalmann

Good morning. Can you tell us what your actual ROE was in 2008? And then remind us of the allowed ROE's in your jurisdictions that have been approved with the new rates effective for '09?

Scott Morris

I'll start with the allowed ROEs for '09. In Washington we have a 10.2% allowed ROE. In Idaho it's also 10.2%. In Oregon it's 10%. And then on an actual overall for our utility was 7.95% and then consolidated for the entire company 7.71%.

Brian Russo – Ladenburg Thalmann

Okay. So, I guess what you're kind of insinuating in your press release and earlier comments is that you almost need to haircut that 10.2% by nearly 150 basis points to kind of fit into your earnings guidance?

Scott Morris

That's what we're saying with the expectation of continued regulatory lag as well as certain costs that we're not currently allowed recovery for. So we're trying to set the expectation building off that allowed return. That's correct.

Brian Russo – Ladenburg Thalmann

Okay. What load growth assumptions are embedded in the 2009 guidance and then maybe you could talk a little bit about the various customer class sales in the fourth quarter of '08?

Mark Thies

We've got embedded in growth about 1.5% roughly and as far as growth by sectors I don’t have that in front of me, Brian.

Brian Russo – Ladenburg Thalmann

Just could you kind of qualitatively talk about what you're seeing on the industrial side?

Scott Morris

Sure we have seen some reduction in industrial growth primarily in forest products and mining. However, we have not seen significant reduction in our residential and commercial classes. As a matter of fact we've continued to see strong usage by our customers in those areas.

So while in certain sectors we've seen reductions we're not seeing reductions in other parts of our industrial load growths. It's primarily mining and timber.

Brian Russo – Ladenburg Thalmann

All right and then you're assuming normal hydro conditions. Is that based off of a NOAA forecast and if so maybe you could talk about specifically what forecast you're based off or if there is some sort of internal type of forecast you guys use as well?

Scott Morris

Brian, we're usually forecast around normal hydro and as you know it's very challenging for us to predict the weather, so we look at our snow pack predictions and let me just give you December as an example of why we predict normal.

First going into the first two weeks of December 2008, our snow pack was really roughly about 30% of normal at that point and we were quite concerned. Over the next two weeks we received over 80 inches of snow and our snow pack went up to over 100% of normal in less than a little over two weeks.

We dried out in January and a little bit of February, so now we’re kind of again below normal, but if we get normal precipitation over the next two or three months we’re not too concerned. So it’s really challenging for us to try to peg it exactly. So the best thing that we can do at this point, this early in the snow year is to predict normal precipitation and at this point I don’t have any reason to believe that that’s not going to happen.

If you look at all of the NOAA information right now, it basically says they’re predicting normal precipitation for the year. They are not predicting below normal precipitation. Some services are actually predicting above normal precipitation so given all of that information we feel that a normal precipitation forecast is the proper thing to do.

Brian Russo – Ladenburg Thalmann

Right. Understood. So I guess the next eight weeks are critical for the 2009 hydro conditions and on your next quarterly conference call, you’ll have more certainty as to what those conditions are like?

Scott Morris

Absolutely. By late April or early May we’ll certainly know what our hydro conditions are.

Brian Russo – Ladenburg Thalmann

Okay, just real quickly, on Advantage IQ, you’re forecasting slower internal growth yet you’re maintaining your $0.12 to $0.14 range, I’m just curious why you’re not seeing more pressure on margin or earnings given your outlook?

Mark Thies

Yeah, Ryan, we’re still very bullish about our business. We have a strong value proposition and so we continue to see good results on the sales front. We maintain our guidance and for that reason we expect our business to grow as projected.

As stated, we do have pressures on our business and we are continuing to look at cost reductions and ways for us to be more efficient and mitigate our costs and but with all of that we continue to be very optimistic about the business.

Operator

Your next question comes from James Bellessa – D.A. Davidson & Company

James Bellessa – D.A. Davidson & Company

Did you tell us what the utility's equity position is? I heard book value of about $1 billion and that’s the overall business. What’s the equity in the utility?

Mark Thies

A little over $900 million.

James Bellessa – D.A. Davidson & Company

So that would be something like $16.50 a share or something like that, something in that magnitude?

Mark Thies

You can do the calculation. Yes.

James Bellessa – D.A. Davidson & Company

$16.50-$17.00. So here we have the stock at or below that level of your overall book value and then your utility. Would you be issuing stock under your issuance plans at the low book value?

Mark Thies

Our intention, Jim, would not to issue stock below our book value. So we will continue to watch market. Yes, currently we are just below that number, but our expectations would not be to issue stock below that level.

James Bellessa – D.A. Davidson & Company

You indicated that you had this litigation at one of your subsidiaries, I would assume that it is not your utility or your Advantage IQ subsidiaries?

Mark Thies

That would be correct.

James Bellessa – D.A. Davidson & Company

And are there any subsidiaries where– that are large enough to have a million dollars' litigation? It sounds like – what are the sizes of those subsidiaries that you have?

Scott Morris

It’s a legacy case left over from Avista Energy.

James Bellessa – D.A. Davidson & Company

And then you indicated you had a lot of snow at the end of the year and first of January, and it's melted. It sounds like and perhaps does that allow good runoff in the first quarter and helps your first quarter results?

Scott Morris

You know, Jim, I think it was drier than normal in January as you well know. We did have some extra water running both from [inaudible] and the Spokane River.

James Bellessa – D.A. Davidson & Company

In your Washington decision that went into effect in January 1, 2008, it was both electric and natural gas $33.5 million. Now you’ve had a whole year under those rates, did you collect the $33.5 million or was there something that helped you have more than that or less than that?

Mark Thies

Jim, we don’t track what the change in revenue is from a single rate adjustment. As you know, there are changes in revenues related to weather, and other changes in revenue; also we have expense changes, too. It’s pretty difficult to track a single change in rates.

James Bellessa – D.A. Davidson & Company

And your 10-K, when will that be filed?

Christy Burmeister-Smith

February 27th.

Operator

Your next question comes from the line of Hasan Doza – Luminus Management.

Hasan Doza – Luminus Management

A couple of quick questions, first on pension, can you refresh us as to what is the pension expense for '09 and whether or not it had any EPS impact?

Mark Thies

The pension expense we filed in our request for our rate case totaled $22.5 million of which about two-thirds of that will be expense and one-third of that goes to capital in our labor loadings. That would be the anticipated amount that we would expect and that is included in our expectations and our guidance.

Hasan Doza – Luminus Management

Was there a cash contribution in '09 in your pension plan and if there was do you have the amount?

Mark Thies

What we have said was the expected contribution, we have not made the contribution yet in 2009, but the expected contribution we expect to be approximately $48 million. That compares to a $28 million contribution that we made in 2008. But it is an increase.

Hasan Doza – Luminus Management

The second question on Advantage IQ, you guys mentioned some of the store closings and bankruptcies in your client base. I mean can you give a qualitative idea as to what types of businesses are having those issues and secondly, when you kind of sign on new customers, given the general weakness, are you being flexible in your terms when you sign up new customers right now versus say six or eight months ago?

Scott Morris

Yes. First of all, when we look at signing on new customers we’re always working very closely with our clients about terms and pricing, etc. so, we’ve always maintained that posture and continue to maintain that posture as I said, we actually started out the year very strong and we’re bullish about our business.

In terms of store closings and bankruptcies, maybe a couple of the most notable might be Circuit City for instance, is going through a liquidation.

We’ve got pretty strong retail client base. 500 clients, 82 Fortune 500 clients and you’ve got companies like a Circuit City, like a Linens and Things for instance where you do see liquidation and going out of business. We’re just trying to understand what those impacts might look like through '09 and into 2010 and prepare for it.

Operator

Your next question comes from the line of Chris Shelton – Millennium Partners.

Chris Shelton – Millennium Partners

On the Dribble Program, I thought that you said that you did 750,000 shares I guess in fourth quarter, how much do you have left on that program to do?

Mark Thies

It’s a 2 million share program. We did 750,000, but that was in third quarter of 2008.

Chris Shelton – Millennium Partners

The third quarter and the 750,000 is all you’ve done.

Mark Thies

So we have 1,250,000 shares remaining under that plan.

Chris Shelton – Millennium Partners

But you’ve got some room left on there, I guess, the leftover amount, should we expect you, assuming the markets are conducive to doing equity, assume you kind of keep using that program to access the equity markets for your own [inaudible] plan.

Mark Thies

To the extent, yes, again there are a lot of factors that go into that to the extent that the market comes back and we determine that that makes sense. Yes, we would anticipate using that plan to meet our needs.

Chris Shelton – Millennium Partners

Okay, and as you said in the release the other option is you can use short-term debt in the meantime.

Mark Thies

Yes, we have plenty of liquidity to be able to meet our needs through 2009.

Chris Shelton – Millennium Partners

Okay and then a quick follow up on the pension, you said $48 million does that have to be done by a certain point in '09 or do you have some discretion on can you do it piecemeal?

Mark Thies

By September 15th is when we have to make our contributions by if we want the tax deduction on it. So that is our expectation.

Chris Shelton – Millennium Partners

Okay and finally I just wanted to ask one question on the Attorney General appeal, how would the refund be determined if they ruled that some should be refunded?

Scott Morris

I'll let Kelly answer that, but again I want to emphasize that we are confident in the process that it was fully looked at. We had as we talked about agreement from staff over at low income [assets] and we're confident, however, if there is refunds and I don’t want you to really focus on that, but if there were to be.

Kelly Norwood

If the court were to rule in Public Council's favor it would be remanded back to the Commission. The Commission would further consider the issues and they would make a decision and that would ongoing forward basis. As Scott mentioned we're pretty confident the Commission made the right decision. They had a sound basis for their decisions.

Chris Shelton – Millennium Partners

Okay so this case is in the courts not in front of the Commission at this point?

Kelly Norwood

That is correct.

Chris Shelton – Millennium Partners

Okay so you're saying the court decision would be maybe mid-year and then post that it would be remanded back to the Commission if anything was to develop?

Kelly Norwood

Yes and our expectation is it would be at least mid-year before we receive anything from the courts.

Chris Shelton – Millennium Partners

Okay and have you reserved anything for that case yet, it sounds like you're pretty confident around it?

Mark Thies

We have not reserved anything.

Operator

Your next question comes from Patrick McGlinchey – Sidoti & Company

Patrick McGlinchey – Sidoti & Company

Just could you remind us on your – the forest product and the mining you were speaking of earlier, what portion of the business is that on the utility side?

Scott Morris

I wouldn’t – it's not a huge portion. It's, as you know, we have a very diversified economy here in the region. I would say 25 years ago it would have been a much more devastating hit to our revenues but today I would say mining and forest products make up less than 10% of our industrial revenue if that.

Patrick McGlinchey – Sidoti & Company

Okay and then just industrial on a whole then as a portion of the business?

Scott Morris

Less than 20%.

Patrick McGlinchey – Sidoti & Company

Okay and then just further with the economic conditions in the service areas, on the industrial side have you heard of anyone in the forest product or mining or any other industrial customers then that have planned to suspend their business for any period of time in the near future or is there any risk of that in 2009?

Malyn Malquist

Well as you know, with forest products I mean with the housing starts being what they are that yes, we've seen significant amount of our bills in our service territory have laid off most of their workers at this point in time.

And while we do have some mining that's been affected, particularly a couple in our northern Idaho area we do still have very strong growth happening at the Lucky Friday mine and some other mines. So I think it really depends on the commodity that they're mining and so we're seeing some weakness in some areas but continuing usage by others.

Patrick McGlinchey – Sidoti & Company

Okay and then just quickly on the Advantage IQ side then, you sort of qualitatively spoke of the type of customers that you were seeing going through bankruptcy procedures and whatnot. But is there any quantitative numbers that you can give us, a percentage of the customer base that you've lost?

Stu Stiles

You know it's really early in the year and we're trying to, Patrick, get a handle on it as we watch the retail industry especially as we watch developments we're trying to understand how that might impact our business.

The couple I cited were what we know about as we start out the year, I think what we'll do is watch very closely through '09. Continue to monitor events and work closely with our customers. So as we've indicated we've maintained guidance at $0.12 to $0.14 and we're bullish and excited about those.

Malyn Malquist

And Patrick by the way our industrial revenues are 10.2% of our overall revenue.

Operator

And your final question is a follow-up from the line of Paul Ridzon – Keybanc Capital Markets

Paul Ridzon – Keybanc Capital Markets

What kind of initial capital outlay do you have in IQ Project is that I wouldn’t imagine it was a whole lot of equipment or anything but is there any risk there?

Stuart Stiles

No there really isn’t, Paul. It's minimal.

Paul Ridzon – Keybanc Capital Markets

Okay and just again then in IQ, your 25% revenue growth, we don’t seem to be observing a whole lot of operating leverage can you just drill down a little bit deeper as to really kind of more detail about what's happening?

Stuart Stiles

I mean we continue to drive efficiencies in our business and continue to manage costs very closely and very well. As we grow revenues I think we've seen a lot of downward pressure on our business with the interest rate environment. For goodness sakes you had December 16th you had Fed funds rates go to in effect zero and so I think that has put some downward pressure on the business and but in the face of that our value proposition is strong. We've continued to grow the business and add continue to add clients and customers so again we're pleased with that.

Malyn Malquist

Paul, this is Malyn. I can't help but jump in with one last answer here. I think what you're seeing really is the fact that the reduction in interest revenue which really flows right down to the bottom line, that's a very profitable piece of our business, that has dropped significantly, the profitability on the customers that we are signing as new customers continues at about the same rate that it has historically.

We're making good margins on those customers.

It is competitive but we're being pretty selective and I think doing a good job, Stu and his team, of selling profitable business. So that side continues to be strong. We just have seen a real reduction in margins as a result of the interest rate environment and that's going to come back at some point.

Stuart Stiles

It will and as Malyn mentioned we're real pleased that we maintained really a 96% retention rate on our clients over the last several years. And so we're heads down. We're going to keep growing the business, adding clients, which will grow our daily balance and then when and if the interest rate environment comes back in a couple of years then we'll be poised to move forward.

Paul Ridzon – Keybanc Capital Markets

How much of the pressure is related to commodity prices coming off and therefore overnight balances being down?

Stuart Stiles

Our daily balances are really up because we're adding clients and so it's much more very specific interest rate pressure.

Paul Ridzon – Keybanc Capital Markets

Okay so falling gas prices aren’t really hurting you that much?

Stuart Stiles

No our electricity expense is a much greater portion of our business.

Paul Ridzon – Keybanc Capital Markets

And then just one last question on the appeal by OPC, if it were remanded back to the Commission would any Commission action be prospective or could it be retroactive? I was a little unclear on that?

Kelly Norwood

My understanding is that they could go back if the court were to remand it back, it could be some refund. But bear in mind that of the issues that were raised the dollar amounts built in rates on the issue that were raised are pretty small.

Paul Ridzon – Keybanc Capital Markets

OPC has proven to be pretty aggressive on tracing things that have been pretty fully vetted from what we've seen recently, would that be fair?

Scott Morris

Again this is Washington, Paul not Oregon.

Unidentified Corporate Participant

He's referring to Office of Public Accounting.

Scott Morris

Office of Public Accounting, oh, I apologize.

Malyn Malquist

You know if you look at the Commission's order, what you'll see I think is the Commission was pretty thorough in reviewing all of these issues. As we've stated before we think the Commission made the right decision based on solid evidence that they had in the records so we're, as I said before, pretty confident that we're in good shape here.

Operator

Your next question we have a follow up from the line of Brian Russo – Ladenburg Thalmann

Brian Russo – Ladenburg Thalmann

Just on IQ can you give us a sales mix breakdown of what is exposed to the interest rate and the carrying side of the business versus service revenues?

Stuart Stiles

Well really our entire business is exposed to the interest rate environment because we process and pay bills on behalf of our clients. As we look at our business we have a pretty significant retail base of customers, that's the base that we're watching most closely as we look at organic growth, bankruptcies closing stores etc. But our entire base of business we basically pay the bills for.

Brian Russo – Ladenburg Thalmann

Okay can you confirm that the following are customers of IQ, Starbucks, Movie Gallery, Pier One Imports and Home Depot?

Stuart Stiles

Really our customers really ask us not to identify them publically, most of those and so I just soon not Brian.

Brian Russo – Ladenburg Thalmann

Okay one last question on IQ, you'd mentioned kind of a target of $100 million in revenue as like the critical mass you may need to effectively monetize that business. Just want to know if that's still the target and then number two are there any other roll up opportunities out there with any other privately held companies like your acquisition of Cadence earlier last year?

Stuart Stiles

Yes we continue to, good questions, we continue to work at ways to potentially monetize our business as we said over the next two to four years. That $100 million target is definitely still our target and over the next couple of years we're going to continue to pursue that. That would give us the flexibility as the market turns around to take this business public if we decided to go that avenue.

And then secondly we're always looking at opportunities to grow our business and always looking for ways to augment our services and provide more value to our customers, so we're going to continue to do that through '09.

Operator

And we have a follow-up question from James Bellessa – D.A. Davidson & Company.

James Bellessa – D.A. Davidson & Company

Taxes other than income taxes went down about $2 million. Was there something unusual about the year ago fourth quarter or unusual about the fourth quarter of '08?

Mark Thies

We did some property tax true ups in the fourth quarter and we used a consultant and they were able to help us lower our property taxes.

James Bellessa – D.A. Davidson & Company

Will those change the pattern for the future or is it just the fourth quarter benefit?

Mark Thies

We would anticipate that we would have stable – we got to a level where we expect that that will be stable going forward. We don’t expect continued reductions as we go forward.

Operator

And this concludes the question and answer portion of the call. I would now like to turn it over to Mr. Jason Lang for closing remarks.

Jason Lang

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

Operator

Thank you for your participation in today's conference. You may now disconnect and have a wonderful day.

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