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Executives

Jason Lang - Investor Relations Manager

Scott Morris - Chairman, President and CEO

Mark Thies - Senior Vice President and CFO

Dennis Vermillion - Senior Vice President and President, Avista Utilities

Kelly Norwood - Vice President, State and Federal Regulation

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

Analysts

Paul Ridzon - KeyBanc

Michael Worms - BMO Capital Markets

Avista Corp. (AVA) Q2 2013 Results Earnings Call August 7, 2013 10:30 AM ET

Operator

Welcome to the Q2 2013 Earnings Conference Call. My name is Vanessa, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

And I will now turn the call over to Jason Lang. You may begin.

Jason Lang

Thank you, Vanessa, and good morning, everyone. Welcome to Avista’s second 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 the President of Avista Utilities, Dennis Vermillion; Vice President, State and Federal Regulation, Kelly Norwood; and the Vice President, Controller and Principal Accounting Officer, Christy Burmeister-Smith.

I’d like to remind everyone that some of the statements that will be made today are forward-looking statements that involve assumptions, risks and uncertainties which are subject to change.

For reference to the various factors which could cause actual results to differ materially from those discussed in today’s call, please refer our Form 10-K for 2012 and Form 10-Q for the first quarter of 2013, which are 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 $0.43 per diluted share for the second quarter of 2013, compared to $0.31 for the second quarter of 2012. On a year-to-date basis, our consolidated earnings were $1.13 per diluted share for 2013, compared to $0.96 for 2012.

Now, I’ll turn the discussion over to Scott Morris.

Scott Morris

Well, thank you, Jason, and good morning, everyone. I’m pleased to report that we had another strong quarter with higher than expected earnings at the Utility and Ecova. Our Utility earnings are over our expectations due to the timing of operating expenditures, the net benefit from the Bonneville Power Administration settlement and warmer weather during the second quarter.

As previously discussed on July 1st, an unplanned outage occurred at Colstrip Unit #4. While the initial cause of the outage is still being investigated, the outage is expected to last at least six months.

We expect to incur additional power supply costs during the second half of the year to replace the lost energy and Mark will provide more details about the impact of this outage in just a couple of minutes.

Ecova had another good quarter, with increased revenues resulting from the demand for new services, increased volumes, and expense and data management services, and energy management services.

Based on the year-to-date results and the timing of revenues, we expect Ecova to be within our expectations for the full year. And 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 significantly in our generation, transmission and distribution systems.

Utility CapEx was $145 million for the first half of 2013 and we expect Utility CapEx be about $270 million for the full year of 2013.

On the regulatory side, in May, the Washington Commission approved our accounting and ratemaking treatment related to the Bonneville settlement and the Reardan wind project. We recognized the net earnings benefit from the approval during the second quarter.

And in our Oregon jurisdiction, we plan on to file a general rate case during the third quarter of 2013. The Oregon Commission can take up to 10 months to review the filing and issue a decision.

So now I’m going to turn the call over to Mark.

Mark Thies

Thank you, Scott, and good morning, everyone. For the second quarter of 2013, Utility earnings increased from 2012, contributing $0.41 per diluted share as compared to $0.31 last year. On a year-to-date basis, Utility earnings contributed $1.11 per diluted share, an increase from $0.97 last year.

The increase in quarterly and year-to-date Utility earnings was primarily due to an increase in gross margin which was a result of general rate increases in Washington that went into effect on January 1, the net benefits from the Bonneville settlement and warmer weather during the second quarter. This increase in gross margin was partially offset by higher depreciation and amortization and taxes other than income taxes.

For the second half of 2013, we expect the negative impact to gross margin in the range of approximately $6 million to $7 million as a result of the recent outage at our Colstrip generating facility that Scott mentioned.

We also expect a reduction, as we have seen in our operating expenses compared to the forecast, to partially reverse and have more expenses coming in the second half of the year due to timing.

For the first half of 2013, we recognize a pre-tax benefit of $4.1 million under the Energy Recovery Mechanism in Washington, compared to $5.1 million in the first half of 2012. The Colstrip outage is expected to move the Energy Recovery Mechanism from a positive position within the 75-25 sharing bands to a slightly negative position within the $4 million deadband for 2013.

For the first half of 2013, Ecova’s earnings increased from 2012 contributing $0.05 per diluted share, as compared to $0.01 last year. Ecova’s year-to-date revenues increased $9.9 million compared to the first half of last year and totaled $87 million.

Total operating expenses increased $4.6 million for the first half and the increase primarily reflects an increase in other operating expenses of $3.2 million, and an increase in depreciation and amortization of $1.4 million.

The net loss from our other businesses was $0.03 per diluted share for the first half of 2013. The losses for the first half were primarily result of an impairment loss recognized during the first quarter, increased costs associated with exploring strategic opportunities and litigation costs related to previous operations of Avista Energy. These losses were partially offset by net income at METALfx.

As of June 30, we had $280 million of available liquidity under our $400 million committed line of credit, with $96 million of cash borrowings and $24 million in letters of credit outstanding. In August 2013, we expect to enter into $90 million loan agreement with an institutional investor that will mature in 2016.

In the first half of 2013, we issued $3 million of common stock without any issuances under our sales agency agreements. We expect to issue up to $50 million of common stock in 2013 in order to maintain our capital structure at an appropriate level for our business. Ecova has a $125 million committed line of credit with various financial institutions that expires in July of 2017.

At June 30th, Ecova had $52 million of borrowings under this agreement. Based on certain covenant conditions contained in the agreement, as of June 30th, Ecova could borrow an additional $17 million and still be compliant with our covenant.

As Scott mentioned, we are pleased with the results in the first half of the year. And we are confirming our 2013 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 in 2013.

We expect our 2013 Utility earnings to continue 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, a 3% to 4% increase in operating costs, excluding the cost under the voluntary severance plan in 2012, and by an increase in power supply costs associated with the coal strip generating facility.

Our range for Avista Utilities encompasses expected variability and power supply costs and the application of the interim to that power supply cost variability. The midpoint of our Utility guidance range does not include any benefit or expense under the ERM. And, as mentioned earlier, we currently expect the ERM to be in a slightly negative position within the $4 million deadband for this year.

Our outlook for Avista Utilities assumes, among other variables, normal precipitation, temperatures and hydroelectric generation for the remainder of 2013. For 2013, we continue to expect Ecova to contribute in the range of $0.10 to $0.14 per diluted share and we continue to expect our other businesses to contribute a loss of $0.02 to $0.04 per diluted share.

I’ll now turn the call back over to Jason.

Jason Lang

Thanks Mark. Vanessa, now we’d like to open this call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from Paul Ridzon with KeyBanc.

Paul Ridzon - KeyBanc

Good morning, guys. How are you?

Scott Morris

Good morning, Paul. Good.

Paul Ridzon - KeyBanc

Congratulations on a solid quarter.

Scott Morris

Thank you.

Paul Ridzon - KeyBanc

Particularly on Ecova, kind of, putting on a strong number. Just wondering your review of strategic opportunities, kind of, where that stands and if you’ve gotten any indications of where that might go?

Scott Morris

Nothing really new to report, Paul. We continue to look for opportunities out there that are longer-term in nature. And we continue to assess opportunities. So there really isn’t anything new to report.

Paul Ridzon - KeyBanc

Okay. And if I heard you right, you have issued none of the $50 million you expect to issue this year of common stock?

Scott Morris

That’s correct, Paul.

Paul Ridzon - KeyBanc

And then, just a reminder, I know the 3% to 4% excludes the separation costs. How much were those costs?

Mark Thies

Last year the cost of the separation was just over $7 million.

Paul Ridzon - KeyBanc

$7 million, that’s pre-tax?

Mark Thies

Yeah.

Paul Ridzon - KeyBanc

Okay. Thank you very much.

Operator

(Operator Instructions) And we have a question from Michael Worms with BMO Capital Markets.

Michael Worms - BMO Capital Markets

Good morning, everyone.

Scott Morris

Good morning, Mike.

Mark Thies

Hi, Mike.

Michael Worms - BMO Capital Markets

Hi. A question, can you just go over the reasons for the 3% to 4% increase in O&M costs this year? And can you kind of give us an indication of where that might be going in 2014? And what are the drivers on the increases, particularly since you just got a rate increase decision in Washington earlier in the year?

Mark Thies

Well, the rate increase doesn’t have any impact on the O&M cost, means, that the O&M -- that was based on history. The O&M cost increases primarily were driven by employee-related costs from a perspective of some raises, pension and post-retirement benefits. We’re the largest drivers of our O&M cost.

And then the timing of the maintenance on different plants, we did have a major maintenance on a plant at Colstrip this year. So that’s included in that. So, we haven’t given forward expectations on what we expect in 2014.

Next quarter, we’ll come out. Typically, we do in November. We’ve come out with our expectations for the next year. So, we are under spent in O&M through six months but we think some of that was timing and it will come back. So we’re just saying we’ll still be within our expectations.

Michael Worms - BMO Capital Markets

Okay. Thank you.

Mark Thies

Thanks Mike.

Operator

And we have no further questions. I will now turn the call back over to Jason Lang for closing comments.

Jason Lang

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

Operator

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

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