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Executives

Jason Lang – Manager, IR

Scott Morris – Chairman, President and CEO

Mark Thies – SVP and CFO

Kelly Norwood – VP, Avista Corporation; VP, State and Federal Regulations, Avista Utilities

Analysts

Paul Ridzon – KeyBanc

Mike Klein – Sidoti & Co

Brian Russo – Ladenburg Thalmann

Julien Dumoulin-Smith – UBS

Michael Worms – BMO

Avista Corporation (AVA) Q1 2013 Earnings Call May 1, 2013 10:30 AM ET

Operator

Welcome to the Q1 2013 Earnings Conference Call. My name is Christine and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduction a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Jason Lang, Manager of Investor Relations. You may begin.

Jason Lang

Thank you, Christine and good morning everyone. Welcome to Avista’s first quarter 2013 earnings conference call. Our earnings were released pre-market this morning and the release is available on our website at avistacorp.com.

Joining me this morning are Avista Corp, Chairman of the Board, President and CEO, Scott Morris. Senior Vice President and CFO, Mark Thies, Senior Vice President and President of Avista Utilities, Dennis Vermillion, Vice President of State and Federal Regulations, 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’ll 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 which is available on our website.

To begin this presentation, I’d like to recap the financial results presented in today’s press release. Our consolidated earnings were $0.71 per diluted share for the first quarter of 2013, compared to $0.65 for the first quarter of 2012. Now I’ll turn the discussion over to Scott Morris.

Scott Morris

Thank you, Jason and good morning everyone. I’m pleased to report that we are off to a good start in 2013. Our consolidated earnings were above our expectations reflecting improved performance in our utility operations and at Ecova. The increase in our utility earnings over our expectations was due to lower operating cost. Additionally, we will continue to focus on opportunities to manage our operating cost throughout the remainder of this year and forward.

Ecova had a solid first quarter and is on track for the year. It had increased revenues resulting from demand from new services and increased volumes in expense and data management services and energy management services. At this time, we are confirming our consolidated earnings guidance range of $1.70 to $1.90 per diluted share for 2013.

To maintain service reliability at our utility and meet the energy needs of our customers. We continue to invest significant in our generation, transmission and distribution systems. Utility CapEx was $71 million for the first quarter of 2013 and we expect utility CapEx to be about $260 million annually in 2013, ‘14 and ‘15.

Based on current snowpack levels and recent precipitation, we expect normal hydroelectric generation for the year. Also net power supply costs, including natural gas fuel prices, are below the level included in base rates, all of which benefits both customers and shareholders. The Idaho Commission approved our multi-party general rate case settlement in March with new base rates that went into effect on April 1st and additional rate increases that will become effective on October 1st.

So now I would like to turn this presentation over to Mark Thies.

Mark Thies

Thank you Scott. Good morning everyone. For the first quarter of 2013, utility earnings increased contributing $0.71 per diluted share as compared to $0.67 last year. The increase was due to $7.1 million increase in gross margin, which was primarily the result of general rate increases in Washington initiated on January 1st.

The increase in gross margin was partially offset by higher depreciation and amortization and taxes other than income taxes. For the first quarter of 2013, we recognized a pre-tax benefit of $3.1 million under the Energy Recovery Mechanism in Washington compared to $4.2 million in the first quarter of 2012.

For the first quarter of this year, Ecova’s earnings increased from 2012 contributing $0.02 per diluted share as compared to a loss of $0.01 last year. Ecova’s quarterly revenues increased $5.4 million compared to the first quarter of 2012, and totaled $42.4 million. Total operating expenses at Ecova increased $0.9 million for the first quarter. The increase in operating expenses primarily reflects an increase in depreciation and amortization of $700,000 due to intangibles recorded in connection with the LPB acquisition last year and an increase in other operating expenses of $0.2 million.

The net loss from our other businesses was $0.02 per diluted share in the first quarter of 2013. This primarily resulted from an impairment loss, increased cost associated with exploring strategic opportunities and litigation cost related to the previous operations of Avista Energy. These losses were partially offset by METALfx’s net income.

As of March 31st, we have $335 million of available liquidity under of $400 million committed line of credit with $52 million of cash borrowings outstanding, and $13 million in letters of credit. In the first quarter of 2013, we issued $1.1 million of common stock without any issuances under our sales agency agreements. In 2013, we expect to issue up to $50 million of common stock and up to $100 million of long-term debt, in order to maintain our capital structure at an appropriate level for our business.

The majority of the issuances are expected to occur in the second half of the year. Ecova has a $125 million commitment line of credit, with various financial institutions with an expiration of July, 2017. At the end of the first quarter, Ecova had $54 million of borrowings outstanding under this agreement and based on certain covenant conditions in their agreement as of March 31, Ecova could borrow an additional $11.6 million and still be compliant with its covenants.

As Scott mentioned, we are off to a good start and we are confirming our consolidated guidance to be in the range of $1.70 to $1.90 per diluted share. We expect Avista Utilities to contribute in the range of $1.64 to $1.78 per diluted share for 2013. We expect our 2013 earnings to be positively impacted by general rate increases.

However, we expect earnings to continue to be limited by slow load growth due to the economy, as well as a 3% to 4% increase in operating costs excluding 2012 costs under the voluntary severance incentive plan. 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 utility guidance range does not include any benefit or expense under the ERM.

We are now expecting, to be in a benefit position under the ERM within the $4 million to $10 million band, which is shared 75% with customers and 25% with the company. It is important to note that the forecast of our position in the ERM can vary significantly due 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 Utilities assumes among other variables, normal precipitation, temperatures and hydroelectric generation for the remainder of the year. For 2013, we expect Ecova to contribute in the range of $0.10 to $0.14 per diluted share and we expect operating revenues to be in the range of $1.70 to $1.90 with approximately 50% derived from expense and data management services, 45% from energy management services, and 5% from new products or new services.

We expect approximately one-third of earnings to occur in the first half of 2013 and two-thirds to occur in the second half of this year. We expect the other businesses to contribute a loss of $0.02 to $0.04 per diluted share and this expectation includes cost of exploring new – exploring opportunities to develop new markets or ways for customers to use electricity and natural gas for commercial productivity and transportation.

I will now turn the call back over to Jason.

Jason Lang

Thanks Mark. Christine, we’d now like to open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question is from Paul Ridzon of KeyBanc. Please go ahead.

Paul Ridzon – KeyBanc

Good morning.

Mark Thies

Good morning Paul.

Jason Lang

Hi Paul.

Paul Ridzon – KeyBanc

Mark, can you just repeat what you said about where you expect to be in the ERM? I missed that.

Mark Thies

We expect to be in the benefit position in the band of $4 million to $10 million, which is shared 75% with customers and 25% for the company.

Paul Ridzon – KeyBanc

Is that?

Mark Thies

There’s a change, when we had it in the prior announcement quarter, we expected to be within the $4 million and the original $4 million debt band. So this is an improvement from there for the company.

Paul Ridzon – KeyBanc

Okay, great. And at Ecova of significant revenue pick up from new services can you just dive a little deeper as to what’s going on there?

Mark Thies

Well, the primary new service we have is a real estate owned. We call it business in which we work with processors of mortgages and we are able to turn on and turn off service and provide other services in that foreclosed market or foreclosed housing market and that’s going to make up the bulk of our 5% and that’s consistent with what we’ve seen in the first quarter.

Paul Ridzon – KeyBanc

Okay, thank you very much.

Mark Thies

Thanks Paul.

Operator

Thank you. Our next question is from Michael Klein of Sidoti & Co. Please go ahead.

Mike Klein – Sidoti & Co

Hi, good morning.

Mark Thies

Good morning Mike.

Mike Klein – Sidoti & Co

Real quickly, can you just touch upon the $12 million revenue from BPA, what was that associated with?

Kelly Norwood

This is Kelly Norwood. We had settlement agreement with Bonneville Power Administration which we had been negotiating with them, to sign an agreement with them in last 2012. FERC approved that settlement agreement in February of this year and the result of that was provided about $12 million of revenue to the company and of course, we filed with Idaho Commission and Washington Commission’s to address the distribution of that between the company and customers.

And for Idaho in the last settlement, the agreement was 90% would go back to customers and so in the first quarter we’ve got $4.1 million is Idaho share. So 10% of that was retained by the company in the first quarter of this year. In Washington, we filed a petition in April asking the commission to approve the accounting treatment for that and what we’ve proposed therefore, for Avista’s keep the $7.6 million Washington share, and then we’ve also proposed in connection with that, that we would absorb the Reardon investment of $2.6 million.

So the net benefit to the company would be $5 million and that would be recorded in Q2, but also part of that filing. We would set aside $2.1 million of that 2013 Bonneville revenue and that would be set aside, and rebated to customers in the future. So all of that, if the Washington Commission approves it will be recorded in the second quarter.

Mike Klein – Sidoti & Co

Okay, sorry couple moving pieces there. So is it a $5 million benefit you would record in the second quarter or?

Kelly Norwood

Yes, there would be a $5 million benefit in the second quarter and then as we progressed through the year. We’d set aside $2.1 million Washington share that would be rebated that $2.1 million would normally flow through the ERM and so depending on where you’re at in that debt band sharing band that would impact, whether who would get that money. Whether it’s customers or the shareholder?

Mike Klein – Sidoti & Co

Sure, okay. Thank you. And guess kind of looking bigger picture now around Ecova and I understand that earnings are primarily a second half event, but can you just talk about what you’re seeing now in the first half of the year versus your expectations and how the business is tracking and I apologize, if you already this answered this question, I’ve been jumping around a bit.

Scott Morris

I would just say that, as we said before that we expect it’s a two-third, one-third split and Ecova’s on track. They’re focused, we like where our revenues are, we like where our sales are, we also like the fact that they’ve been very focused on business process improvement and continuing to be disciplined with their cost structure. So we’re right where – we think they’ve should be.

Mike Klein – Sidoti & Co

Okay and with operating expenses. Do you see the ability to extract more cost from the business model or is this kind of run rate to expect going forward?

Mark Thies

Well, I think that’s something that they consistently look at. They’re as Scott mentioned looking at business process improvement that’s an ongoing process with them. So some of it with the operating expenses, as you expect to have when we give the range of $170 to $190 million in revenues and when you look at the first quarter revenues, that if you did that on a times four, base is $42 million. You’re going to get the very low end of that.

So we do expect our revenues to increase over the year, from the first quarter levels with that you can have some increase in operating expenses as you deliver the services, but we do expect them to continue to manage their services as they always do and we always expect that both at Ecova and at the Utility. We do that at the utility as well.

Mike Klein – Sidoti & Co

Okay, thank you.

Mark Thies

Thanks Mike.

Operator

Thank you. Our next question is from Brian Russo of Ladenburg Thalmann. Please go ahead.

Brian Russo – Ladenburg Thalmann

Hi, good morning.

Mark Thies

Hi Brian.

Scott Morris

Hi Brian.

Brian Russo – Ladenburg Thalmann

I – just maybe if you can talk a little bit more about the ERM balance. The new assumption versus the prior assumption because hydro conditions are normal like you said, so and we’re seeing gas prices rise rather significantly in 2013. I’m just curious where is the dynamic there that enables you to retain and even greater benefit.

Mark Thies

Again, what we look at is we have our detailed models that plot out everything over the course of when the timing of when hydro comes off, what our expectations are on a monthly basis, what market prices are out in the market, can we fuel or un-fuel our plants depending so gas prices go up. If there is enough margin there, we can fuel or un-fuel our plants and that helps benefit to offset the cost of our power supply cost.

And that as we move into the 75%, 25% debt band benefits both the shareholders and the customers, so that’s just it’s what we forecast on a detailed basis over the course of the remainder of the year and it has a lot of different implication. So the extent, (inaudible) moves out. We have an ability to capture some of that value and provide that back to both the company and the customers through the ERM and that’s where our forecast is today.

Now that said, that can change Brian I mean if, if things move in the future of hydro comes off, it’s still early, right? If hydro comes off differently because of the shape of the melt, back and change things and if gas prices move away, when hydro is off that can also effect things, but right now where we stand, we believe we’ve improved. Based on our – on what we see going forward.

Brian Russo – Ladenburg Thalmann

Okay and the utility earnings guidance for ‘13 and the midpoint assumes no ERM, does that imply you’re at the higher end of utility guidance as of now?

Mark Thies

It implies that where we are with, with respect to the ERM there would be a benefit to that, in the guidance, I’m not going to say to the high end exactly, but we are above the midpoint because the midpoints got zero in there. So those calculations you can make again, $0 million to $4 million is the debt band, we keep that and then plus we are in the 75%, 25%. I don’t tell you, where we are within that $4 million to $10 million. So you ought to make an assumption yourself.

Brian Russo – Ladenburg Thalmann

Okay and the ROE range in 2013, of eight in the quarter 9% average 8.6% is that, like the new level of lag that we should be assuming going forward or do you have leverage to pull to improve upon that?

Mark Thies

Well for one thing, we are in a stay out in Washington and Idaho until 1/1/15. So we continue to look at trying to manage our cost, but also managing our business. We have run a safe, reliable electric and gas system. So we look at all of that, as we go forward that eight in the quarter, does a nine as where we are for ‘13, in the utility guidance range and when we come out with ‘14. We will tell you, if that’s at but until then, I think what we are trying to say is we’ve made progress.

We used to say 70 to 90 basis point for structural that still exist and then we used to say, 60 to 80 basis points was timing. We’ve made some really good progress on that, we are probably down to 20 or 30 basis points now. We still have some timing lag because we are deploying capital and our cost are going up, somewhat so we try to manage that.

We do have step adjustments in each our rate cases, so that’ll help to offset that. So we haven’t given ‘14 guidance but we do have a 1/1/14 adjustment in Washington and that rate case settlement and then in October adjustment in our Idaho settlement, October of this year. So that will help us manage through that lag.

Brian Russo – Ladenburg Thalmann

Okay, great and then just I thought I read in the press release electric usage per customer is down. I’m just curios if you can comment on that and then, maybe give us a sense of how load growth is tracking relative to your forecast or what’s in rate etc?

Mark Thies

Well again, we’ve said over our forecast at the low end over periods 0.7% little over 1% to 1.5% and we are at the low end of that, we expect to be at the low end of that. Our retail loads were down slightly in the first quarter. Our industrial loads, so really commercial and residential were down slightly – industrial were up slightly, but remember we had some operational challenges in the prior year, but that’s largely fixed now. Primarily the – mine was out and now they’re coming back.

So I don’t think there’s anything, that I would say is structurally off. It was just a slight decrease in the first quarter.

Brian Russo – Ladenburg Thalmann

All right. Thank you very much.

Mark Thies

Thanks Brian.

Operator

(Operator Instructions). Our next question is from Julien Dumoulin-Smith of UBS. Please go ahead.

Julien Dumoulin-Smith – UBS

Hi, good morning. Can you hear me?

Mark Thies

Yes, good morning. Julien.

Scott Morris

Good morning.

Julien Dumoulin-Smith – UBS

Excellent first question here. Some thought to resource additions. Broadly speaking, obviously there is some resources on the table in that market of the country. I’m being curious to the extent that you’re looking forward, your IRP process etc. Do you think that you could look at any potential near-term acquisitions to address longer term resources needs?

Mark Thies

I think as we do and we are going to do our resource plan. We will have another one, that will come out this fall August or September, and we always look at but we’re in great shape for where we are, would be look at anything that’s, that came out of the market. Sure, we look when assets come up, but they have to make a tremendous amount of sense for us because we are not resource short.

So when we look at, what we found is when bidders come in that, they bid those assets up and we are not competitive because we are not going to overpay for an asset, we don’t need to.

Scott Morris

Julien, also we are very focused on continuing to upgrade and maintain our hydro system. So we put a significant amount of capital in our resources on the Clark Fork. We are finished with that, but now we are looking at our hydro facilities on the Spokane River and we are currently looking at opportunities to upgrade some of those dams and that will give us a little bit of extra incremental hydro, but as you look at our integrated resource plan.

We are long generation to the end of this decade, so we will be very prudent and wise in anything we do around, adding the resources.

Julien Dumoulin-Smith – UBS

And then secondly, sort of on the less traditional investment side. You’ve obviously alluded over times to various different avenues, at what point do you think, you will make more of a definitive statement. Here’s the direction we intend to go or is that’s the way, this is going to work.

Mark Thies

I think, we’re gathering information, we are looking at a lot of different opportunities, when we have something that we feel is announceable [ph] or more specific. We will come out and talk about that, but right now we are doing evaluation of lot of different opportunities and none of them were signed contracts and so we are looking at this as an opportunity.

We think make sense to do this evaluation and we don’t have a set timetable but I would say in the next six months to 18 months, we will have something over the course of that, we’ll talk about.

Julien Dumoulin-Smith – UBS

Great, so looking back at the quarter here. Just to be very specific about it. Looking at the BPA revenues is that a first quarter or second quarter. How the revenues recognized in your earnings, just to be very clear about that?

Kelly Norwood

The revenues – this is Kelly. The revenues came in the first quarter but we deferred the Washington piece instead actually deferred all of that and set it aside, except for 10% of the Idaho shares, so let’s back up. As of roughly $12 million, 4$ million is Idaho and $8 million is Washington.

So in Idaho, all the revenue came in but $400,000 which is 10% of the Idaho actually went to earnings pre-tax. In Washington, all of it set aside pending the commission’s decision in Washington on what we do with that, and so that will be or should be a second quarter item.

Julien Dumoulin-Smith – UBS

Reflected in your earnings.

Kelly Norwood

That’s correct.

Mark Thies

So then Julien, the difference the 90% in Idaho went to customers. So that’s deferred back to customers.

Kelly Norwood

That’s right.

Julien Dumoulin-Smith – UBS

Right, great. Excellent and then perhaps just sort of last question here. Ecova obviously sort of on people’s mind. How you looking at the first quarter success specifically bookings, year-on-year relative to plan just if you could firm up with some more statistics, if you don’t mind?

Mark Thies

Well we don’t – we haven’t specifically come out with bookings or pipelines or any details there we talk about revenues and we’re on track, we’re slightly ahead of where we expect it to be. So we feel good about that, but recognize we’re going to have a little bit of caution in that, one-third of the earnings comes in the first half of the year, two-third coming in the second half.

We feel, as Scott mentioned. We feel, we’re right on track with what we’re doing and our revenue growth was positive.

Scott Morris

Couple of the areas Julien that we talked about last year that have lagged are back on track. Specifically Mark mentioned the REO, real estate owned business and we’re also we’re pleased with, how our utility energy efficiency business is recovering and doing well and is back on track as well. So because of that and the continued solid performance of our base business, we are right, where we expect to be.

Julien Dumoulin-Smith – UBS

Excellent, well thank you very much for the time.

Mark Thies

Thank you Julien.

Operator

Thank you. Our next question is from Michael Worms of BMO. Please go ahead.

Michael Worms – BMO

Thank you, good morning, guys.

Mark Thies

Hi Mike.

Scott Morris

Hi Mike.

Michael Worms – BMO

How are you doing? Can you just give us an update remind us of what we the uplift is from the rate increases that you’d expect to come forward in October, I believe in from Idaho was it? And there was another one, that would support to help your the earnings going forward into 2014?

Kelly Norwood

Yes, this is Kelly. In October of this year ‘13, we will have a $7.8 million electric rate increase and $1.3 million natural gas rate increase and then in January 1, ‘14 in Washington, we will have a $14 million electric rate increase and a $1.4 million natural gas increase.

Michael Worms – BMO

Great and that’s the extent of the incremental rate increases expected for 2014?

Kelly Norwood

That’s correct. Thank you very much.

Mark Thies

Thanks Mike.

Operator

Thank you and now we have a follow-up from Paul Ridzon of KeyBanc. Please go ahead.

Paul Ridzon – KeyBanc

Can we assume the BPA – the Washington pieces of BPA is take into guidance?

Mark Thies

Can you – no, that’s I mean again we have to look at from a perspective that’s not approved yet. So we don’t put, we are not going to put that into our expectations in overall guidance until we get that approved.

Paul Ridzon – KeyBanc

So that’s potentially $8 million of revenue upside?

Kelly Norwood

No, keeping mind on the Bonneville and Washington. If its approved, we would keep $7.6 million of the Bonneville minus the $2.6 million of Reardon, so that would be $5 million, but we are also setting aside $2.1 million this year for the new revenue. Which so you would have net of potentially $3 million, if it’s approved by the commission.

Paul Ridzon – KeyBanc

Okay, thank you very much.

Mark Thies

Thank you.

Operator

And we have no further questions at this time. I will now turn the call back over to Jason Lang.

Jason Lang

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

Operator

Thank you. And thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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