Avista's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 6.13 | About: Avista Corporation (AVA)

Avista Corporation (NYSE:AVA)

Q3 2013 Earnings Conference Call

November 6, 2013 10:30 ET

Executives

Jason Lang - Investor Relations Manager

Scott Morris - Chairman, President and Chief Executive Officer

Mark Thies - Senior Vice President and Chief Financial Officer

Kelly Norwood - Vice President, State and Federal Regulation

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

Analysts

Michael Weinstein - UBS

Paul Ridzon - KeyBanc

Brian Russo - Ladenburg Thalmann

Operator

Welcome to the Q3 2013 Earnings Conference Call. My name is John and I will be your operator for today’s call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Jason Lang. Mr. Lang, you may begin.

Jason Lang - Investor Relations Manager

Thank you, John and good morning everyone. Welcome to Avista’s third 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; Vice President, State and Federal Regulation, 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 will be made today are forward-looking statements that involve assumptions, risks and uncertainties, which are subject to change. For reference to the various factors which could cause actual results to differ materially from those discussed in today’s call, please refer to our Form 10-K for 2012 and our Form 10-Q for the second quarter of 2013, both which are available on our website.

To begin this presentation, I would like to recap the financial results presented in today’s press release. Our consolidated earnings were $0.19 per diluted share for the third quarter of 2013, compared to $0.10 for the third quarter of 2012. On a year-to-date basis, our consolidated earnings were $1.32 per diluted share for 2013 compared to $1.06 for 2012.

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

Scott Morris - Chairman, President and Chief Executive Officer

Well, thank you Jason and good morning everyone. Our third quarter results were above our expectations and we continue to experience a good year at both the Utility and at Ecova. We are excited about the recent announcement to acquire Alaska Energy and Resources Company, a privately held company based in Juneau, Alaska. We are looking forward to working with our highly skilled and dedicated employees and our management team to being – and being part of Juneau community. The planned acquisition has a purchase price of $170 million less the assumption of net debt. We expect this transaction to close by July 1, 2014 following the receipt of the necessary regulatory approvals and the satisfaction of other closing conditions. This agreement reflects Avista’s strategy to expand and diversify energy assets and to deliver long-term value to the customers and communities, investors that we serve.

The primary subsidiary of AERC is Alaska Electric Light and Power Company. In 2012, AEL&P had a total rate base of $111 million providing electric service to approximately 60,000 customers in Juneau. This company is just a great strategic fit for our company. We are excited to move into the State of Alaska and what a better place to do it than the state capital. It’s a hydro-based utility. And as you know that, it’s just our sweet spot. It’s got some great growth potential. We feel fortunate with both the opportunity to grow just residential, but also they have some good mining load that we are excited to investigate. And I am very proud of the team, we kept our discipline and we acquired the property at a fair price. So, overall, a really good deal for the team.

Turning to our third quarter results, our earning – our utility earnings increased due to warmer weather during the third quarter and lower-than-expected operating cost. Ecova had a strong third quarter and remains on track to meet our full year expectations for 2013. We are very pleased with the rebound at Ecova and it has experienced so far in 2013 and we are well-positioned for the future. Based on our year-to-date results and expected fourth quarter performance, we are confirming our 2013 earnings guidance with the expectation of being near the middle of the range. We are initiating our 2014 earnings guidance, which shows our consolidated range of $1.77 to $1.97, an increase of 4% as compared to 2013 guidance. This guidance excludes the impacts of the planned acquisition of AERC and Mark is going to provide more teal details on our earnings guidance in just a few minutes.

Utility CapEx was $220 million for the first nine months of 2013. We expect utility CapEx to be about $280 million in 2015. We have increased our planned capital expenditures by $75 million in 2014 and $100 million in 2015. This is to meet an increased demand for utility capital projects.

On the regulatory side in August we filed a general rate case in Oregon requesting an overall 9.5% increase in base rates. The filing is designed to – excuse me is designed to increase annual natural gas rates by $9.5 million. The Oregon Commission can take up to 10 months to review the filing and issue a decision.

So now I am going to turn this presentation over to Mark.

Mark Thies - Senior Vice President and Chief Financial Officer

Thank you, Scott. Good morning everyone. For the third quarter of 2013 our utility contributed $0.16 per diluted share compared to $0.13 last year. On a year-to-date basis utility earnings contributed $1.27 per diluted share, an increase from $1.10 last year. The increase in quarterly and year-to-date utility earnings was primarily due to the general rate increases and warmer weather during the second and third quarters. This increase was partially offset by higher operating expenses depreciation and amortization and taxes other than income taxes. In addition, the year-to-date results included the net benefit from the settlement with Bonneville Power Administration.

In the first nine months of 2013, we have recognized a pretax expense of $0.5 million under the Energy Recovery Mechanism in Washington compared to a benefit of $5.9 million in the first nine months of 2012. The Colstrip outage and higher natural gas fuel prices are expected to move the earned to the ERM to a negative position within the 50% customer and 50% company sharing bands for 2013. We also expect a reduction we have seen in our operating expenses compared to our forecast to partially reverse in the fourth quarter due to timing of certain expenditures.

Moving on to Ecova, as Scott said their earnings for the first nine months increased significantly from 2012 contributing $0.09 per diluted share as compared to $0.02 last year. Ecova’s year-to-date revenues increased $17.7 million as compared to 2012 and totaled $133 million. Results for the year-to-date included the recognition of a $2.3 million rebate during the third quarter associated with achieving certain milestones on a five-year contract related to expense and data management services. Ecova’s total operating expenses increased $8.4 million for the first nine months and totaled and $122 million. The increase reflects an increase in operate – other operating expenses of $6.4 million and an increase in depreciation and amortization of $2 million.

The net loss from our other businesses was $0.04 per diluted share for the first nine months of 2013. The losses were primarily the result of impairment losses recognized during the first and third quarters, increased costs associated with exploring strategic opportunities and litigation costs related to the previous operations of Avista Energy. These losses were partially offset by METALfx’s net income.

I am now going to talk about liquidity and our financing plans. As of September 30, we had $306 million of available liquidity under our $400 million committed line of credit with $66 million of cash borrowings and $28 million in letters of credit outstanding. In August, we entered into a $90 million term loan agreement with an institutional investor that matures in 2016. The net proceeds from this agreement were used to repay a portion of corporate indebtedness in anticipation of $50 million in first mortgage bonds maturing in December. In the first nine months of 2013 we issued $4 million of common stock without any issuances under our sales agency agreements. We expect to issue an additional $2 million under these plans during the fourth quarter.

Our planned common stock issuances for 2013 have decreased from our previous estimate of $50 million due to our ongoing business requirements and the planned acquisition of AERC. Moving on to 2014, we expect to issue up to $190 million of long-term debt in 2014 including up to $90 million of debt associated with the rebalancing of the consolidated capital structure at AERC assuming that transaction goes forward. This amount assumes we are going to refinance the existing net debt outstanding at AEL&P, the primary subsidiary of AERC and the net debt outstanding at AEL&P does not include the Snettisham obligation. We also expect in 2014 to issue up to $145 million of common stock related to the closing of the planned acquisition. Without the planned transaction, Avista Corp would have required up to $75 million of common stock to maintain an appropriate capital structure. AELP currently has an authorized utility capital structure of 53.8% equity and an authorized return on equity of 12.875%. We expect that AELP will maintain this capital structure. The consolidated capital structure of AERC is expected to mirror the capital structure of Avista Corp.

Ecova has $125 million committed line of credit with various financial institutions with an expiration date of July 2017. At September 30, Ecova had $50 million of borrowings outstanding under this agreement. Based on certain covenant conditions contained in the agreement as of September 30, Ecova could borrow an additional $31.5 million and still be compliant with its covenants. As Scott mentioned, we are confirming our 2013 guidance for consolidated earnings to be in the range of $1.70 to $1.90 per share with the expectation of being near the middle of that range. And this includes the expected negative impact of the ERM. And again, the ERM is expected to be in the 50:50 sharing band.

We expect Avista utilities to contribute in the range of $1.64 to $1.78 per diluted share for 2013. And this – the impact of the ERM in that 50-50 sharing band is primarily due to the effects of the Colstrip generating outage and higher natural gas fuel prices. Our outlook for Avista utilities assumes among other variables normal precipitation, temperatures and hydroelectric generation for remainder of the year. 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 the other businesses to be a loss of $0.02 to $0.04 per diluted share for 2013.

We are initiating our 2014 guidance for consolidated earnings to be in the range of $1.77 to $1.97 per diluted share. This range does not include any impacts from the planned acquisition of AERC. We expect that the addition of AERC to Avista Corp will be slightly negative to earnings in 2014 and that it will contribute positively in earnings in 2015. We expect Avista utilities to contribute in the range of $1.68 to $1.82 per diluted share for 2014. As compared to 2013, we expect our utility earnings to be positively impacted by general rate increases and we expect our earnings to be continuing to be limited by slow load growth, a delay in the recovery of operating expenses and capital investments and approximately 2% growth in our operating expenses.

Our range for Avista utilities encompasses expected variability and power supply cost in the application of the ERM to that power supply cost variability. The midpoint of our utility guidance does not include any benefit or expense under the ERM. In 2014, we expect to be in a benefit position under the ERM within the 75% customer and 25% company sharing band.

Our outlook for Avista utilities assumes among other variables normal precipitation, temperatures and hydro. For 2014, we expect Ecova to contribute in the range of $0.12 to $0.16 per diluted share. We expect operating revenues at Ecova to be in the range of $180 million to $200 million with approximately 53% derived from expense and data management services and 47% from energy management services. We expect approximately one-third of the earnings to occur during the first half of 2014 and two-thirds of the earnings to occur during the second half of the year. We expect our other businesses to be between a loss of $0.01 and a loss of $0.03 per diluted share, which includes increased cost associated with exploring strategic opportunities

I will now turn the call back over to Jason.

Jason Lang - Investor Relations Manager

Thanks Mark. John, we would now like to open the call up for questions.

Question-and-Answer Session

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Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Michael Weinstein from UBS. Please go ahead.

Michael Weinstein - UBS

Hi, how are you doing?

Scott Morris

Good morning Mike.

Mark Thies

Hi Mike.

Michael Weinstein - UBS

Just wondering on the acquisition, so you are not going to include this Snettisham obligation that’s $74 million, is that correct?

Mark Thies

Sounds right, it’s in that range. I don’t know the exact, yes.

Michael Weinstein - UBS

Right, so it sounds like the amount of debt actually being assumed is only about $32 million, coming in at that.

Mark Thies

What we said was the purchase price of $170 million less net debt, and we expect to issue $145 million of equity. So that's the difference between debt and cash that our expectation is at the time we expect to close by July 1.

Michael Weinstein - UBS

Right, but the equity is about $70 million of that is for the acquisition right, $75 would have been issued anyway.

Mark Thies

Well, that’s right, but the transaction is 100% equity, 100% well there’s some small amount primarily equity. There is a small amount that's not, but otherwise it's all stock so it will be a stock issuance.

Michael Weinstein - UBS

Right.

Mark Thies

And then, we already needed that other amount. It slightly accelerates our $75 million because we are looking at doing that over the second half of the year. So assuming we close the transaction that will slightly accelerate our equity issuance, but not by much.

Michael Weinstein - UBS

Got it. And the dilution in 2014 does that include one-time fees, things like that?

Mark Thies

Yes, part of it - that’s primarily the reason we have it in little bit of the equity, the equity acceleration is the primary reason we have slight dilution.

Michael Weinstein - UBS

Okay, from the accelerated equity, I get it, okay. Alright, and hopefully I won’t take too much time here, a lot of people, but also any future equities beyond that, you mentioned that there is going to be more capital spending?

Scott Morris

Yes, we have expected just with the nature of additional capital projects that we find at our utility and they are really good projects we believe that that make sense so we will give out 14 guidance, we don't know give in the future, but as we continue to expand that we would look to have maintain that prudent capital structure that we always do. So that would include some additional equity.

Michael Weinstein - UBS

Right. What’s your ROE in Washington and Idaho and how are you earning right now?

Mark Thies

Well our allowed ROE is 9.8%.

Michael Weinstein - UBS

Right.

Mark Thies

On structural lag – structural lag of 70 to 90 basis points, those are just costs, whether they’re marketing or different costs that aren’t allowed by law or by practices that’s what we have. And then our range and our guidance is expected to be from the bottom end about 8.4% ROE and on the top end 9.1% ROE. So we really don't have a significant amount of lag. We will have a little bit of lag in 2014 with because again we have a stay out in Washington and Idaho and we're not – we can’t have rates increased until 1/1/15, but we still expect to spend the additional $75 million in capital projects because we believe it's the right thing to do to spend that capital to maintain our system.

Michael Weinstein - UBS

Do you guys have any unfavorable foreign exchange at all coming in (indiscernible)?

Scott Morris

We have very little foreign exchange. We have little – we buy some gas in Canada, but we generally try to hedge that foreign exchange risk all the time, so we really don't have significant foreign exchange risk.

Michael Weinstein - UBS

One last question, are you guys thinking at all about Ecova spin or sale on the back of this deal, some kind of swap of earnings?

Scott Morris

Well, Michael just say this, first of all we’re really excited about where Ecova is right now and we knew that in 2013 we needed to show that the business get itself back on track and as a reminder for 2004 through 2011 this company performed extremely well with great growth and consistently hit its numbers. We really felt 2012 was a blip and the team is proving that. And we also see that we are very fortunate that we’re on track with 2014. We’re excited about that. So as we've already said we’re going to continue to operate this business extremely well, but we understand for the long-term that we think that it might be in our best interest to think about some other strategic opportunities, so really nothing to report there, but the strategy hasn’t changed.

Michael Weinstein - UBS

Okay, thank you very much.

Operator

Our next question comes from Paul Ridzon from KeyBanc. Please go ahead.

Paul Ridzon - KeyBanc

Good morning.

Mark Thies

Hi Paul.

Scott Morris

Hi Paul.

Paul Ridzon – KeyBanc

Can you tell what happened to the ERM in the third quarter of 2013?

Mark Thies

So the third quarter and the fourth quarter is expected to go down, part of the third quarter was again we announced our second quarter earnings. Colstrip went down July 1 and that was $6 million-$7 million, it was about $12 million of impact, $4 million went to Idaho, which went through the PCA, the difference through Washington and at a position we were in the ERM we were slightly in the 75-25 band. We took about 100% of that through the interim. So that was the big driver from the third quarter’s perspective. In the fourth quarter its primarily natural gas prices and the shift in natural gas prices somewhat – a little bit associated with Colstrip as its hitting, but it's really the change in gas prices and some slight change to hydro. So that’s why we are going from we are at $0.5 million right now in the negative and we expect to be in the –m into the 50-50 sharing band which that band is $4 million. And then it goes the next 6 up to 10. But that – we expect to be in the 50-50 sharing band, so we know we have lost almost $4 million.

Paul Ridzon – KeyBanc

And where were at the end of 2Q?

Mark Thies

$4.1 million in the present position.

Paul Ridzon – KeyBanc

Positive?

Mark Thies

Yes, in the benefit position. And so really the majority of all that is the impact Colstrip, the differential is some slight impacts to hydro and natural gas prices, primarily natural gas prices.

Paul Ridzon – KeyBanc

And what’s your outlook for the Colstrip return?

Mark Thies

We expect that that continues to be expected to February 1 that hasn’t changed.

Scott Morris

And no change there Paul everything is on track.

Paul Ridzon – KeyBanc

And I am a little bit wrapped around the axle around what happened to the equity – the planned equity issuance, so how much equity will the existing owners of the Alaskan assets receive?

Mark Thies

The expectation at this point $104 million - approximately $145 million, it’s 100% equity acquisition, last net debt. And so our estimate at this time is approximately $145 million will be the purchase price at closing and we are assuming will close by July 1.

Paul Ridzon – KeyBanc

So given – excluding this acquisition you are going to do $75 million and you have since raised your CapEx forecast how do those dovetail?

Mark Thies

The CapEx forecast included in the $75 million, we have our CapEx forecast. We also in the release we had – we have about well I don’t know if we put it and we have about $50 million that we are going to get a tax cash this year. So on certain tangible property, repairs allowance from federal regulations, we expect to file that this year and get the cash. Well, that help fund our next year I am sorry ’14 to help fund our CapEx. That's why we didn’t need as much additional equity.

Paul Ridzon – KeyBanc

And what has AELP earned historically on an ROE basis?

Mark Thies

If you go – you can go back in their Form-1s and calculate that 2012 was a little bit different because they had a sale of power and telephone company and that was a non-operating income that moved their earnings up to $9.1 million other way. And then in 2011 they made $5.7 million on a net income basis. And in ’12 there was that unusual transaction, that’s just from their Form-1.

Paul Ridzon – KeyBanc

And are you anticipating any operational synergies here?

Mark Thies

No they really operate as a separate. I mean they are electrically an island. They are not interconnected to anybody and they have done a terrific job of managing their business. So they have as Scott mentioned strong hydro that covers their load. They are about an 80 megawatt load and they have you strong hydro. But they also have almost 100% effectively diesel backup and that’s because they are not connected to any – interconnected to anybody. So to serve their customers they need to maintain that and they have done that terrifically.

Scott Morris

That’s one of the things Paul. What we really liked about the business was they were extremely efficient. Their management team is really good. When you go up and look at the just the operations the way they have maintained and operated their system, their construction standards, the way they have maintained their hydro all top-notch. So and they have done it with – in a way with a very eye on keeping their cost down. So a good business and really we plan on continuing to have them operate as they are.

Paul Ridzon – KeyBanc

And is there a CapEx opportunity within the hydro – could you upgrade any of the hydro?

Scott Morris

Yes there is opportunities that some of what we need to consider. There are a couple of opportunities to do some upgrades to some hydro facilities that we will consider in the future as well as continuing to serve some large mining load up there that I know that is currently on diesel. So we will look at those opportunities once it closes and see if there is some way we can grow the business.

Paul Ridzon – KeyBanc

And then lastly can you put any bookends on how accretive you think it could be in ’15?

Mark Thies

No, I mean, it’s not going to be a significant addition. If that’s what you are looking at, probably by less than $0.05 if that’s a bookend for you, I guess it is.

Paul Ridzon – KeyBanc

That’s one kind of a bookend.

Scott Morris

Well, the other side is accretive. So I gave you both sides.

Paul Ridzon – KeyBanc

Okay, thank you very much.

Operator

(Operator Instructions) Our next question comes from Brian Russo from Ladenburg Thalmann. Please go ahead.

Brian Russo - Ladenburg Thalmann

Hi, good morning.

Mark Thies

Hi, Brian.

Scott Morris

Good morning Brian.

Brian Russo - Ladenburg Thalmann

I apologize, but I am a still little confused on the financing of AERC, can you run through that again?

Mark Thies

Sure. So we expect again with the $170 million of the acquisition just to step back from it, we would expect normally to issue approximately $100 million associated with just our operations in debt – on the debt side. So with this recapitalization, we expect $90 million, an additional $90 million. So there is $90 million. On the equity side again, its $75 million is what our expectations were versus $145 million in the transaction, so that would attribute $70 million. The difference is about $10 million in cash.

Brian Russo - Ladenburg Thalmann

Okay, so how much are you actually issuing? How much is the equity portion of this overall $170 million?

Mark Thies

$145 million.

Brian Russo - Ladenburg Thalmann

Enterprise value, that’s $145 million, okay. Okay. And then you are going to issue, I think you said $50 million to recapitalize?

Mark Thies

No, no, we are going to issue $145 million of equity upon the close of the transaction, then only we will rebalance the capitalization, because that’s 100% equity. We are going to – we expect and again this may or may not go in our assumptions we expect to refinance their existing debt.

Brian Russo - Ladenburg Thalmann

Okay.

Mark Thies

And that would include – that would be up to $90 million, including their existing debt.

Brian Russo - Ladenburg Thalmann

Okay, got it. Alright, thank you. And is there a lock-up period with these private – soon to be private holders of your stock?

Mark Thies

No.

Brian Russo - Ladenburg Thalmann

No lock-up.

Mark Thies

No.

Brian Russo - Ladenburg Thalmann

Okay. And are there roll-up opportunities with other small privately held Alaska-based utilities that this can be kind of seen as a strategy for you and a platform for growth in Alaska?

Scott Morris

Well, just Brian let me just say this. What we want to do is we want to go into Alaska and be great corporate citizens. We want to do the right thing in the capital and really show the state that we are one of the best operating utilities in the country and we think if we just do what we always do, which is stay focused on providing great service, treating our communities well, our employees well and making sure we give good returns for shareholders that, that hopefully other communities will see that and we hope that, that will help drive other opportunities to the future, but we are just going to keep our eye on the ball and just do our normal great job in Juneau that we expect that we always do when we operate a utility.

Brian Russo - Ladenburg Thalmann

And it looks like the growth in your O&M expenses is decelerating in 2014, can you comment on kind of the drivers there?

Scott Morris

Well, the biggest – the biggest driver is really as we have seen is our costs have gone up and accelerated in the past. It was because of a declining discount rate and declining interest rates that cause our pension expenses to go up, that interest rates have increased. And the expectation is that, that discount rate will increase and that actually lowers our pension cost, so one of the bigger drivers is a lower pension and postretirement costs. And again, we continue to manage our cost. We are focused on that. We did the program at the end of last year to reduce some costs and reduce some headcount. That impact continues to roll through our business. We continue to manage effectively. And we are always looking at trying to manage our costs in an efficient manner. So those are the primary drivers.

Brian Russo - Ladenburg Thalmann

Okay, thank you very much.

Scott Morris

Thanks Brian. I am sorry, fine.

Operator

We have no further questions at this time.

Scott Morris - Chairman, President and Chief Executive Officer

Alright, I would like to thank everyone for joining us today. We certainly appreciate your interest in our company and we look forward to seeing most of you at the upcoming EEI conference. Have a great day.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference.

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