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Avista Corporation (NYSE:AVA)

2013 Annual Shareholders Meeting Call

May 9, 2013 11:15 AM ET

Executives

Scott Morris – Chairman, President and CEO

Mike Noel – Director

Dennis Vermillion – SVP; President, Avista Utilities

Jeff Heggedahl – CEO, Ecova

Mark Thies – SVP and CFO

Analysts

Doug Kilgore – Worker Owner Council

Glade Best

Ross Oliver

Scott Morris

So I would like to welcome you to Avista’s 2013 Annual Meeting of Shareholders. A beautiful spring day here in Spokane, it’s just gorgeous outside and being a hydro-utility, sometimes when it’s this warm, we love the weather, but sometimes we get a little grumpy because of the run off. But we like the weather anyway.

As we begin this morning’s meeting, I will caution you that we will be making forward-looking statements that involve risks and uncertainties, which are subject to change. You can read the fine print, if you’d like. I would direct you to Avista’s Form 10-K, which was filed with the SEC on February 26th and is also available on our website for reference to the various factors, which could cause actual results to differ materially from those, contemplated to the extent these factors are not discussed in this meeting.

Before I start the business portion of the meeting today, I’d like to introduce our board of directors. You’ll note that the names of all of our board members and their backgrounds appeared in your proxy statement. So, I’ll introduce the board by name and ask them to remain standing until all of our directors have been introduced. Can you please hold your applause until I’ve introduced all the board members? This is also a great opportunity for us to thank each of our directors for the amount of time they dedicate and the great work they do for our company.

So, our board members are Erik Anderson, Kristie Blake, Don Burke, Rick Holley, John Kelly, Becky Klein, Mark Racicot, Heidi Stanley, and John Taylor are our board of directors. Now, there is a very special person that I’ve saved for last on purpose and Mike Noel is retiring as a board member at this Annual Meeting.

He’s been a dedicated member of our board for nine years, and we are so grateful for Mike’s this many contributions and his friendships for all of us. During the past nine years, Mike has served as a member of the audit committee, the finance committee and the compensation committee and was also designated the financial expert for the company. He has shown outstanding dedication and commitment to Avista.

We’re going to miss his statesmanship, his mature counsel on the board; his many, many years of utility experience that he brought to the position. We want to wish Mike much future success and happiness. Ladies and gentlemen, it’s my pleasure to introduce Mike Noel, Mike?

Mike Noel

I’d also like to acknowledge our retired directors who are with us today; it’s always great to have some of our retired directors join us. I’ll call their names and I’d like to ask them to stand. Our former Chairman Larry Stanley is here with us this morning Larry, and former Director Dave Clerk. Can you please welcome, Larry and Dave?

Before I introduce the executive officers, I would just like to take a minute and acknowledge our employees, that all of our actives and retireds, for their dedication and their support, you know, our employees just step up to every challenge and they not only provide that excellent customer service, but they show a sincere commitment to the company, to our customers, and to the communities that we serve, our employees are what really make this company great and we’re just blessed to have some of the best employees in the country here at Avista.

So, with that, I would like to introduce our executive officers. You’ll note that the various areas for which the executive officers are responsible appeared in the annual report. So, I’m going to just introduce them by name only. Please hold your applause until they’ve been introduced. I’ll ask each person to please stand and when I call your name, and remain standing until you’ve all been introduced.

Our executive officers are Christy Burmeister-Smith, Marian Durkin, Karen Feltes, Jim Kensok, Don Kopczynski, Jason Thackston, Mark Thies, Dennis Vermillion, Roger Woodworth and the President and CEO of Avista, Jeff Heggedahl, our Executive Officer of Ecova, excuse me, what did I say. Jeff, you can have my job, I’m ready to turn the keys over. And not here today are Kelly Norwood and David Meyer are folks that work in our rates area, they’re in Olympia today and couldn’t be with us.

So, now that I got that one out of the way Jeff, I guess, that one out of the way. At this time, we would like to convene the business portion of the meeting. The first matter to be considered at this meeting is the election of directors, 10 directors are standing for election for a one year term. The board recommends a vote for each director and there are no other nominations.

So, the second matter to be considered at this meeting is the proposal by the board of directors that the shareholders ratify the board’s appointment of the firm Deloitte & Touche as the independent register public accounting for 2013. The board recommends a vote for this proposal.

The third matter to be considered is the proposal by the board of directors to amend the company’s restated articles of incorporation to reduce certain shareholder approval requirements. The purpose and reasons for this proposal was addressed extensively in the company’s proxy statement, and the board recommends a vote for this proposal.

And the fourth matter to be considered is an advisory vote on the company’s executive compensation. The board recommends a vote for this proposal.

If there are any shareholders, who have not voted, you may execute a ballot at our investor relations table when you leave the meeting today, please indicate on the ballot, the number of shares you own and Mark can sign your ballot. Those who are voting this morning can be assured that their vote will be included in the final results.

As you are aware a large majority of our shareholders have voted in advance of this meeting and preliminary voting results as of this meeting shows that all of the proposals that pass with the exception of proposal three. This proposal did not receive approval of 80% of the outstanding shares that it needed to pass.

So, with that, that includes business portion of our meeting today. What I would like to do now is to, what we all would like to do is, to talk a little bit about the business and helping me do that today is going to be Dennis Vermillion, the President of Avista Utilities, Jeff Heggedahl, the CEO of Ecova, and Mark Thies, the Chief Financial Officer of the Company.

You know, in 2012 we did have a very challenging year and I know you’re all aware of that. We worked really hard to make sure that 2013 we get things back on track. But, frankly in 2012, we had a few things that were really kind of out of our control, the first one being of course the economy and everybody’s had trouble with the economy, but as you’ve seen the economic recovery begin in the country, we just haven’t seen that in our service territory yet.

Our unemployment rates in our service territory are at or above the national level, we really haven’t seen the new construction come back that you would expect in recovery, we haven’t seen the loan growth that you would expect in recovery. So, from an economic perspective, we just really haven’t seen did hit our service territory yet.

The other thing that happened in 2012 was in the fourth quarter, we just had a warmer than normal quarter, it was warm. And that’s not good for a utility, so when you put those two things together, it made a challenging. However, there are some things we needed to do that were within our control that we needed to get in order for 2013. And the first thing was our cost, we just simply had to do some things to make sure that we had good cost control and I can say there are employees stepped up and did a great job of bringing in their 2013 budget flat.

Now, you also know that we did a voluntary severance program that we implemented and put into place at the end of 2012. And with those two things alone, we’ve been able to set the stage, I think for good control of our cost in the ‘13 and well in 2014 as well.

The other thing we needed to do is continue to work with our regulators, and make sure that we could – good fair rate recovery through the process. And in 2012, we did a great job of settling two rate cases in both Washington and in Idaho. The two year settlements and they’re really win-wins, they’re win for our customers because it gives me them some rate certainty and rate clarity over the next couple of years and it allows us the ability to earn or allow rates of return, more closely earn or allow rates return and also the start to begin to take some of the regulatory lag that we’ve seen in our returns over the last three to five years. So, again a good win-win.

And the results in the first quarter, if there any indication have been good, we had a solid first quarter in 2013, $0.71 per diluted share, that met or exceeded in certain cases analyst estimates. And we’re really pleased with the start, we know we have some more work to do, but we really are pleased with what we are so far.

Before the annual meeting today the board met. I’m pleased to announce that they declare the quarterly dividend of $30.5 diluted share, and I’ll remind you that we did raise the dividend in February this year, and when Mark Thies comes up and gives you an update on the finances of company, he’ll also give an update on our dividends past and future ideas around that.

Ecova is a great business and Ecova, as you recall did some acquisitions at the end of 2011 or early 2012, and they did a fantastic job of integrating those businesses into Ecova a real challenge. But I’ll tell you that through that integration, it did, I think put a little bit of the distraction on the Ecova team and if you look at their sales and their revenue growth in 2012 it wasn’t where it’s traditionally been. And Jeff and his team have done a fantastic job of going out and looking and seeing, what do we need to do to get that revenue back on track. And if the first quarter of 2013 is an indication that they have, they’re doing a great job because the growth in the first quarter was really back in line to where we have traditionally seen the growth for Ecova over the last three or four years.

So, the Ecova team is doing a fantastic job, we’re really blessed with Ecova, it’s a world class team, it’s in the business itself, it’s one of the only businesses in its space that has end-to-end services. Jeff has done a fantastic job of not only putting together a great team at the executive level, but the talent is deep and strong in Ecova. We’re really pleased that Ecova is a part of our company, it’s got a great future and you’re going to hear more from Jeff in just a second.

At the utility again we are going to continue to make the investments in our infrastructure, we are spending about $260 million this year, we will continue to do that really over the next two or three years. So, that investment is really in making sure that our transmission distribution infrastructure is safe and reliable, we are also putting some technology on our distribution system, so that we have a 21st Century smart digital grid, but we are also using some of that technology to make sure that we can serve our customers better and have much better even better customer service than we currently do.

We’re also making investments on our hydro system, you’ll remember that we did a bunch of investments on the Clark Fork River System, but now we are turning our attention to the Spokane River. And we’ve got a lot of work to do on the Spokane River, and Dennis is going to tell you about that, but I would say that we’ll be doing a lot of investments on the Spokane River really to the end of this decade.

We’re also really looking at opportunities to upgrade our workforce, you know, we’ve been talking about the fact that we’re going to have this bow-wave of retirements come and they’re here. In some ways it’s exciting and in some way it’s sad for me personally to see a lot of my friends and colleagues, so I worked with so for many years retire.

But the idea that we’ve had not just for the last year, but really for the last decade just to make sure that we have a train and qualified workforce. We, at this company worked really hard both on the craft and the non union side to make sure that as that bow-wave retirements came that we had a world class workforce, and with Dennis and his group and Karen they’ve done just that. And Dennis would give you an update around that too, when he talks about the utility.

So, our strategies are found, you’re going to continue to see us invest in the utility at that $260 million, while we are going to continue to have to work hard with our regulators. Jeff and his team are going to have to continue to execute around making sure they have that good organic growth.

And also I want to make sure that they keep their cost and control, and Jeff is doing some wonderful things with the business process improvement to make that happen. And finally, put all that together and you’ve got a great investment thesis in why we’re proud to have you as shareholders and why investing in Avista, is such a great thing to do.

And with that, I’m going to turn this meeting over to our President of our Utility, who just does a fantastic job, Dennis Vermillion. Dennis?

Dennis Vermillion

Okay, thanks. I would love following Scott because he talks – he covers everything that I’m going to cover. So, it really is a pleasure to be here this morning, and talk to you about the utility business. You know, our company began 124 years ago on the Banks of Spokane River in a small community that was then known as Spokane Falls.

Over the years as the region grew, our utility grew as well to meet the growing demand for energy. Today, we know that we must continue to care for our legacy assets, the pole and the wires and the gas lines and the generating facilities and so on, so they’re working safely and reliably to meet the continue need for energy and to make sure they’re here for the next generation.

Just to give you an idea what we’re talking about and Scott covered some of this. We have hydro generation assets the day to the early 20th Century, we have poles and wires throughout our 30,000 square mile service area that are 50 to 80 years old, we have miles of natural gas distribution lines that are more than 25 years old, and the backbone of our operations are customer, information system was installed way back in 1992, which is ancient by IT standards.

So, just like many other utilities across the nation, we are continuing to invest millions of dollars each year to modernize our infrastructure and we know that we’ll be making capital of investments of about $260 million per year for the foreseeable future.

As we plan for this work, we’ve divided them into four key areas of investment that you can see on the screen, reliability, repairs, and reducing energy loss, generating power, advance systems or the technology investments that are so critical to interacting with our customers, and of course workforce training. So, we have employees with the right skills to build, maintain and manage the complex systems of tomorrow.

So, let’s take a closer look at each area of investment. In 2007, some our employees got to together to think about ways to see greater efficiency, energy efficiency savings on our side of the customer meter, and to analyze how best to rebuild our aging infrastructure, specifically the distribution system.

Through this work, they’ve developed a very detailed and comprehensive plan, when the American Recovery and Reinvestment Act or the Economic Stimulus Opportunities came about, one of the key requirements was being shovel ready as you recall and because of the work that our employees did, we were shovel ready, we secured over $40 million in grants that helped us modernize our distribution system in Spokane, participate in a smart grid pilot project and Pullman, Washington and implement enhance workforce training programs.

We are one of only a handful of utilities across the country that received multiple grants. We’ve completed many of the upgrades already in Spokane and we’re now in the testing phase for the new equipment when we’re done, we will be saving energy on our system and we will be able to reduce outage times for our customers.

Another example of the repairs we are making is on our – on our system is the natural gas replacement program that we have put in place that’s slated for completion over the next 20 years. The next five years alone, we expect to spend $53 million to replace Adelaide pipe on our service area.

There are over 700 miles of this plastic pipe that was installed prior to 1987. Last year we completed work in Davenport, Washington west of town here and in Talent Oregon. This year, we have construction projects planned here in Spokane in two Oregon cities and then three areas of North Idaho. This multiyear plan was developed by our employees and received approval and accolades from the utility commission that has become a model and a best practice for other utilities across the country.

We’ve completed upgrades to our crown jewels of our hydro system, our 50 year old Noxon Rapids facility and our Cabinet Gorge Dam, both of which are on the Clark Fork River. In fact, Cabinet Gorge celebrated its 60th anniversary last year. This year, as Scott mentioned, we are going to begin the upgrades to two of our hydro facilities on the Spokane River, and when we talk about investing power generation, it upgrades at 9 miles falls moves to the top of the list and for good reason.

This legacy plan was built way back in 1908, and currently we are in the first year of an eight year project to update and enhance this facility. And believe me if you’ve been out there, it’s long overdue. Also this year, we’ll start work at Little Falls Dam, which is built in 1910. We plan to invest some $6 million to upgrade units one and two and to refurbish the station service there.

Every one of us uses computer technology in one way or another today; our customers have high expectations for speed, accuracy, and efficiency. And I think those expectations are set by increase use of online resources for banking and shopping and even healthcare. It’s more important now than ever that we invest in upgrading and enhancing our digital technology. We are near three of the five year compass project; this project will touch all of our customers and impact nearly every aspect of our business from billing to asset management.

At the end of the day we’ll have a new customer information system and a new enterprise asset management system that will create the foundation for a new enhanced relationship with our customers and we’ll be better positioned to provide the choices that matter most to them. This investment benefits the growing information needs of our customer certainly, but it also gives us the opportunity to achieve a new level of efficient and effective business operations.

Our focus on people culture and safety includes investments in workforce training, we continue to work with local and regionally universities like Gonzaga, Eastern Washington, and Washington State to support their engineering programs through scholarships and investments in new labs and equipment. This is providing us the strong candidates to recruit into our company as the next generation of employees.

And we’re also updating our curriculum at our line school that we run and coordination with Spokane Community College, we’ve constructed new training facilities to give these students the knowledge and skills that they will need to install and maintain equipment on the modern electric grid.

And I’m pleased to report that our employee engagement numbers, which we measure every two years, have gone up once again this year to 81%, this is significantly higher than the norm for all industries as measured by our consultant, Mercer. At Avista Utilities we continue to do what we do best and that’s generate and deliver energy safely and reliably, and we know that our customers are appreciated because we’ve received 90% or better customer satisfaction ratings every year since 1999.

A needless to say, we are very, very proud of all the works that are employees do each and every day, they are knowledgeable, dedicated, engaged and committed to excellence, and I think it shows. So, hopefully that gives you a sense that there’s a lot of great things happening at Avista Utilities, we are taking care of business day and day out, and at the same time we are planning for our energy future.

So, with that it’s my pleasure to introduce Jeff Heggedahl, the President and Chief Executive Officer of Ecova.

Jeff Heggedahl

I’m so pleased that it is Ecova not Avista because I did not have a presentation ready on the broader Avista. So, I was pleased to hear that difference. Scott mentioned we had weaker than anticipated results in 2012, and that’s absolutely true. I would say that 2012 for us however was a transformational year, and really an important year for us that we’ll look back to and point to what an important year that was for us in our future success.

And to start to articulate that I’ll go to a slide that is what we call our purpose statement and it involves, it includes our vision, our mission, our pillars, and our values. And I’ll point to a couple of things that 2012 really helped us with, and I’ll start with a very first sentence, which says that we want to be market leading in the acquisition of LPB and Pernova.

We clearly solidified ourselves as the market leaders in the two businesses that are really most important and foundational to us and that’s an energy supply management or procurement and expensing data management or the bill pay business that Ecova really was founded on. Those two acquisitions, which were companies that we’ve competed with, really rounded out our offering, they improved the services that we offer; they also added some new logos, new clients and ability to cross-sell some more services for us.

Another thing on the purpose statement if you look to the bottom right, you’ll see we call out a pillar of innovation. Those acquisitions helped us significantly from the path of a thing that we celebrate, which is the ability to innovate.

So, with those acquisitions, I’ll point to a couple of things, we got a 24 hour, seven day a week call center that is in the Atlanta, Georgia and that call center is important because with the acquisitions we now connect to the buildings of our clients directly to help them manage their cost and their consumption of the energy in their buildings; make sure that their lights are on only when they should be on, make sure that their temperatures in their buildings are set at the right temperature at the right time.

And make sure that their coolers and things like that having a problem with their functionality, so that’s a brand new service offering for us that we got in part because of the acquisition for Pernova and we’re excited about the future for that.

In addition, we’ve had some other areas of innovation that 2012 proved to be important, on the utility side of the meter, we’ve long – since the Ecos acquisition, we’ve been involved with helping our utilities, manage their energy efficiency program primarily with residents or homes, residential.

This last year, we’ve made some significant progress, and actually adding energy efficiency programs on the commercial and industrial side of the meter, which actually leverages the 24% of the fortune 500 companies that we actually have on the facility side of the meter. The 2012 was a really important year for us, in terms of innovation, and foundationally important for us in the work that we’ve done on solidifying our market leadership.

With the acquisition of Pernova and LPB, it increased the number of clients that we work with and the services that we provide for them to the point that we’re now managing over $20 billion in expenditures, we are working with 50 utility partners and over 700,000 sites, I can’t think of another company that has that understanding of that many buildings of the fortune 500 in the U.S.

A couple notable specific accomplishments, we signed some new plans, so we look at that, we call that logos and then we actually are excited that we are selling more of our services to the existing clients, and that’s how we get our organic growth. A couple of new clients HH Greg and Smart and Final are examples of those clients, who are now connecting to their building using our analytics, our technology, and our call center in Atlanta to help them manage those assets more efficiently.

On the utility side of the meter, again duke energy is an example where we are now working with them on a commercial and industrial, it’s a very complex energy efficiency program that’s new for us and we expect to continue to grow in commercial and industrial side of our utility business.

Organic growth, we are selling more services to the clients that we already have, I’ll just point to Alaska Airlines, where we are now doing some work with them in waste, many people in our industry are on sustainability will say that water and waste are going to be the next the new energy for what our clients are focused on and we are well positioned with our offerings in that space and seeing organic growth from that.

Top leadership, we are excited, we had our 9th year in a row that we got the highest award that’s awarded by the energy star sustained excellence award. So, we’re really recognized as the leader n the market. And Scott mentioned business process improvement, we’ve initiated very aggressive program to improve our cost and our efficiencies, we hired a gentleman and now a team that, he came from a company that had won the Malcolm Baldrige Award.

And the good thing about being market leading for us and having to scale that we have is that now we can work on improving our efficiency, and our business improvement initiatives are completely focused on the very front line of our employees helping us to figure out how we can do our work smarter, better, touch things less often.

Scott already mentioned, but I get to work with the best team you could imagine, I’ve got, and that’s my direct report and the team that they’ve built out. One of the things that’s been great about Ecova and the company that we’ve become as we kind of become that employer of choice when we put requisition out for employees in the marketplace, the resumes that we get are very inspiring. So, we’ve got an amazing team and that should set a foundation for us going forward as well.

So, 2013, what’s that about? It’s about execution; it’s about hitting our guidance of $0.10 to $0.14 in focusing on doing that. We want to continue the cross-sell, the cross selling that we are doing, and in our space we get to talk to a lot of different companies, we know the space really well, I would tell you that there’s a very few, in fact I can’t think of another company that has proven that they can cross-sell the other services to the level that we’ve been able to by being this total energy and sustainability management company.

And then one thing, we’re really excited about with some investment that we’ve done organically; everything that we do is about the data that we gather, so our clients can make better decisions about their assets and their facilities. Once they look at the data, they do that through a platform tool, so they do it.

And that tool that we had needed to be updated and we’ve spent the last 18 months or so developing a new state of the art industry changing platform. And it is now up and running with one of our top five clients, and we are very excited about rolling that out to the rest of our clients, we are excited about it because it will both reduce our cost and increase our customer satisfaction, so that’s the Ecova platform.

I was at a client advisory board, which we have twice a year and some of our largest clients are represented there. And I’ll just pull one of our clients, who is there and their quote was “whoa” and so whereas – the feedback from our client has been really great on this new platform, you think I could have thought of a better quote than “whoa”, right?

So, as we go into 2013, our service offering is well rounded is what we wanted to be, and some of the acquisitions and work that was done in 2012 as well as the organic investment has helped us with that on the utility side, we work with some of the most respected utilities in the country around program strategy, home energy improvement, not just lighting, but overall home energy improvement, our commercial and industrial energy improvement, which is actually there, I mentioned with Duke that we are growing that’s new and really leverages our unique position on being both sides of the meter.

We continue with our retail channel program, so we work with retailers like Home Depot and Lowe’s and helping them to promote energy efficiency products on behalf of our utilities and then measuring the success of those programs.

And commercial and industrial again we’ve rounded out of suite of offering, sustainability has had an increased level of interest from our clients, energy supply management or procurement, the clear market leadership position there with the combination of the companies that we’ve acquired, facility optimization, that example of Smart and Final, where we are managing their stores remotely.

Expense and data management that’s where it all started and we’re, you know, again clear market leadership position there and the best there is in that industry, a lot of our clients that are looking to be more efficient with their energy, most of them also want to spend less money on their telephone, their telecom.

And we’re continuing to help several of our large clients there, and then back to innovation because of the acquisition of LPB and then Pernova, we found a way to take the core competencies that we have, we understand utilities, we understand billing really well. So, now we are helping some of the biggest financial institutions in the country manage their real-estate owned transfer of utilities from one owner to the other primarily in foreclosures, so again those are new opportunities that came because of the investments that we made in the acquisition.

So, from here I’m going to introduce Mark Thies, our Senior Vice President and CFO of Avista.

Mark Thies

Thank you, Jeff. Good morning everyone. I’m going to talk about the financial, the financial results for the company, which Scott explained terrifically in his segment, so I will attempt to be brief as Dennis said as well. Last year was a tough year, it really was; we had net income of $78 million compared to over $100 million prior to that and that was just each and every business was down.

And that’s always a challenge when, you know, sometimes you can have one go down, we had all three, we’re down in the utility, we are down in the Ecova and we’re down in another. But, you know, I think that was a challenge even despite that the board continued to have a confidence in our ability to turn that around and to move forward and raise the dividend 5% last year, and for this year in February, again we’ve raised the dividends and that’s the confidence that we are going to move forward and we are going to have stronger performance.

And as Scott said, in the first quarter, we’re off to a great start, we had $0.71 a share as compared to $0.66 a share in the prior year in each of the businesses improved, the utility improved, the Ecova improved and we had some stabilization in our other businesses. So, that’s been a positive for us, and we confirmed our guidance for 2013, that guidance is $1.70 to a $1.90 a share. So, really when you strip out last year’s $1.32 share, we’re really still back on track to good solid long-term growth and our long term growth platform is 4% to 5% earnings growth.

When you combine that with the strong dividend as Scott mentioned the board just increased, just announced, not increased, announced the dividend again this morning at $0.30 a share, that’s a consistent increase from last year and that at a 4.5% yield and 4% to 5% growth get to 8% to 9.5% total returns at the solid total return for our shareholders as we look forward.

How do we achieve some of that growth? A lot of that growth again is capital deployment in growing our systems, Scott and Dennis both have talked about that, we continue to invest in our system and that investment is just in the nuts and bolts as Dennis said of the pipes and wires of our distribution system, our natural gas system, some growth and we see a big number in technology and that’s again to continue to invest in our system with project compass that Dennis talked about.

We have – from my perspective, this is my favorite, one of my favorite slides, we have very strong liquidity and we are in a terrific shape financially, we have a small, we have a $50 million maturity this year, but otherwise our debt is, we don’t have any maturities until 2018, our long term credit facilities goes until 2017, and we are just in great position, so the money that we raise is really to fund the capital programs that we are deploying.

So, we expect to raise up to $50 million in the equity and up to a $100 million in debt, and that really includes the refinancing of that $50 million maturity in 2012 or in 2013. That keeps us at a very strong investment grade profile and a very solid prudent financial structure with 52% debt and 48% equity.

And again, for the 11th consecutive year we had another increase, we are at our targeted dividend rate of 60% to 70% payout ratio, so we expect that our dividend growth will now mirror our long-term earnings growth. So, in 2013 we had a 5.2% increase in our dividend to an annualized dividend of $1.22 or $30.05 per quarter per share.

With that, I will turn it back over to Scott.

Scott Morris

Again that concludes really kind of the updated of the business. And again, I would just like to say that, you know, Jeff talked about the great team at Ecova and its these officers here that Dennis and I get to work with every day, they do the fantastic job and all of their employees really make this utility such a great utility, so we are blessed.

We do have the opportunity to ask questions, you’ll notice that there are some microphones on each side, if you wouldn’t mind and when you do ask your question, if you could, you know, tell us your name and if you’ve got a question, if you can kind of keep your time to about three minutes, I’d appreciate that would be helpful.

And I’m happy to answer question.

Question-and-Answer Session

Doug Kilgore – Worker Owner Council

Thanks. I’m Doug Kilgore with the Worker Owner Council, Washington State, we are a council of building trades unions and I work on behalf of our pension funds. And now our funds improve in their health in two ways. One, when the assets were invested in appreciate and also when hourly contributions are made when members work on job.

And first there has been a great benefit to our funds in both respects, they’re working, our members are working now on your current project. I’d just wanted to thanks the company for its responsiveness and responsibility when we’ve asked and engaged them around construction issues, everything has always worked out exactly as we might have wished, but the company has been responsive, and Scott more as himself as intervened in our behalf and we appreciate that. Thank you.

Scott Morris

Thank you, Doug. Thank, that’s a great partnership, we appreciate it, any other questions that we have this morning before we conclude.

Glade Best

My name is Glade Best, I live here in Spokane and we had a good first quarter of this year, what’s the outlook here for the second quarter and the last month of April, how did that, any results from that?

Scott Morris

No, we won’t really have results until we can announce second quarter earnings. But as I said the fact that we really did a good job of managing our cost, we really will continue to manage our cost going forward. We are excited that we have normal snowpack this year, so we really expect our power supply expenses to actually be probably below what are in base rates. So, we continue to hope to have some benefit in our energy recovery mechanisms, which will continue to help earnings throughout the year.

Assuming we get some normal hydro, some normal weather, we manage our cost well, and we continue to execute at Ecova, I would expect to continue to perform and meet our expectations to the street. So, we feel good about where we are and we continue to, again the fact that Mark said, we confirmed guidance tells you that we feel confident about where we are headed.

Glade Best

Thank you.

Scott Morris

Anything else?

Ross Oliver

Yes sir. My name is Ross Oliver and I’m a shareholder. And I’m interested in the mechanics of the business a little bit. I want to, I kind of want to know about the power generation aspect of the business, how much electricity do we buy from BBA people and how much do we generate and I’m interested in the gas business, I follow the gas production and the price of gas closely and how is that business or how are we making revenue in that business, how are we taking advantage of the cost opportunities?

Scott Morris

Great question, you know, we might need to get a white board and do a little one on one here, but you know, I’ll do the best I can to kind of condense this. And of course, I’m going to ask if Dennis Vermillion wants to jump in at any point, Dennis please feel free to jump in here. On the electric side, you know, one of the things that we’ve done is that really back in 2000, we were short energy; we didn’t have enough actual generation to serve our needs.

So, we made a decision that we wanted to make sure we had enough generating capacity that we didn’t have to rely on the marketplace, so we did that, we built some generation, we built coyote springs, we brought in a plant called Lancaster. We built some windmills down in the south of blues. And so, when you look at our generation portfolio, we got enough generation to meet our needs on the coldest or warmest day and that’s really our stated philosophy that we have.

You know, that generation is still some of the cheapest in the country because of our hydro, our biomass, we do have 15% of a coal plant called Colstrip that is extremely cost efficient and we meet or exceed all environmental regulations with that plant.

So, I would say in a generation perspective, you know, really, we are long generation until the end of this decade, and the next if you look at our integrated resource planning, probably the next generation that we’ll just need to build us around peeking to make sure we can meet our demand on the coldest day or the warmest day. So, we really don’t need to have a base load plan built probably well into the 2020, which I can’t believe I’m saying that, I mean, I can’t believe, that seems like 2st century stuff.

On the gas side, you know, it’s a little bit different because we don’t own the production facility, we buy all of our gas in the marketplace and that’s intentional. And the way it works on the gas side is that the commission allow us to pass through the 100% either the, all the cost of the gas business going prices rise or decline, we passed that through our customers and we don’t market up and we can’t make a profit on it.

And that’s why there’s been some volatility in gas rates really over the last 10 years and before the cracking kind of phenomena happen, you’ll remember, we had a lot of volatility in our gas rates and that was really from the price of commodity and the marketplace. And now that we sort of have, have this wonderful technology then we’ve got, you know, we went from a net importer to net exporter on an energy perspective, we have more than gas, prices have stabilized.

But where we make our money on the natural gas business is really in the plan, it’s just as when Mark and Dennis were talking about it is investing in our gas facility and earning return on that pipe that we put in the ground with our customers. And that’s the piece of the business that we do earn our returns on; we don’t make a return on the gas commodity nor on the gas transmission to transport the gas to our customers if that pass through.

Scott Morris

Anything else, no? Okay. Any other questions that I can answer for you this morning, so you can go ahead and enjoy that beautiful Spokane weather sunshine and it would be cool down at night just a little, I think Dennis and Mark and I would be probably happy as would Jason Thackston, our Para support person, just a little bit cooler at night.

Mark Thies

Well, thank you very much. We appreciate you coming this morning. And we look forward to seeing you next year. Thank you.

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