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Avista Corporation (NYSE:AVA)

Q4 2007 Earnings Call

February 20, 2008 10:30 am ET

Executives

Scott Morris – ChiefExecutive Officer, Chairman and President

Malyn Malquist –Executive Vice President and Chief Financial Officer

Ann Wilson – VicePresident of Finance and Treasurer

Kelly Norwood – VicePresident, State and Federal Regulation

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

Jason Lang – Manager,Investor Relations

Analysts

James Bellessa - D.A.Davidson & Company.

Brian Russo - LadenburgThalmann.

Paul Ridzon - KeyBanc

Operator

Good day ladies andgentlemen, and welcome to the fourth quarter 2007 Avista Corporation earnings conferencecall. My name is Gina and I will be your coordinator for today. At this time,all participants are in a listen-only mode. We will be facilitating aquestion-and-answer session towards the end of today’s conference. (OperatorInstructions)

As a reminder, thisconference is being recorded for replay purposes. I would now like to turn thepresentation over to your host for today’s call, Jason Lang, Manager ofInvestor Relations.

Jason Lang

Thank you, Gina. Goodmorning, everyone. Welcome to Avista’s fourth quarter and fiscal year 2007earnings conference call. Our earnings were released pre-market this morningand the release is available on our website at avistacorp.com.

Joining me this morningare Avista Corp’s Chairman of the Board, President and CEO Scott Morris; Executive VicePresident and CFO Malyn Malquist; Vice President of Finance and Treasurer AnnWilson; Vice President, State and Federal Regulation, Kelly Norwood; and VicePresident, Controller and Principal Accounting Officer ChristyBurmeister-Smith.

Before we begin, I’d liketo remind you that some of the statements that will be made today areforward-looking statements that involve risks and uncertainties, which aresubject to change. For reference to the various factors whichcould cause actual results to differ materially from those discussed in today’scall, I would direct you to our Form 10-K for 2006, and Form 10-Q for thequarter ended September 30 2007, which are available on our website.

We will also bediscussing our credit rating. It is important to note that these credit ratingsare not recommendations to buy, sell or hold securities. The ratings aresubject to change or withdraw at any time by the respective creditrating agencies. Each credit rating should be evaluated independently of anyother ratings.

To begin thispresentation, I’d like to briefly recap the financial results presented intoday’s press release. Our consolidated earnings for the fourth quarter of 2007were $0.26 per diluted share, compared with earnings of $0.35 per diluted sharefor the fourth quarter of 2006. For the full year of 2007, our consolidatedearnings were $0.72 per diluted share, compared with $1.46 per diluted sharefor 2006.

Now I’ll turn thediscussion over to Avista’s Chairman of the Board, President and Chief ExecutiveOfficer, Scott Morris.

Scott L. Morris

Thanks, Jason, and goodmorning, everyone. As we mentioned earlier in the year, 2007 was the year ofrepositioning our company with a focus on the future of our utility operations.Our consolidated earnings for the full year of 2007 were lower than weoriginally forecasted, and we’re not pleased with these results.

This was due to both theperformance of Avista Energy during the first half of the year and certainvariables that worked against us at the utility. The Washington Commissiondecision in late 2006 to deny our request for more timely recovery oftransmission and generation investments, and to align our cost of power withmarket cost, presented a significant challenge for us without the rate reliefwe had anticipated.

We also experienced lowerthan expected loads in 2007, which were largely weather-related. Our challengewas compounded by below normal hydro generation and higher purchase power andfuel cost that was allowed in rates. This caused us to absorb higher electricresource cost under the Energy Recovery Mechanism in Washington.

However, I believe thatwe are well-positioned to meet the complex challenges in the energy and utilitysector in 2008 and beyond, thanks to the hard work of our employees, and theguidance of Gary Ely, who retired as Chairman of the Board and Chief Executive Officer atthe end of 2007.

Gary led our company from the depths of the energycrisis through the rebuilding of confidence and financial health. And now someseven years later, Avista has regained an investment grade status from bothMoody’s and Standard & Poor’s.

A significant event in2007 was the sale of substantially all of Avista Energy’s contracts and ourongoing operations to Shell Energy. This transaction was completed on June 30;it lowers our corporate risk profile and should improve the stability of ourearnings.

The majority of the $169million of proceeds from the Avista Energy transaction were deployed into ourregulated utility operations. In Washington, we received some much needed rate relief thatshould allow us to improve over 2007. On January 1, 2008, electric rates for our Washington customers increased by an average of 9.4%, whichis intended to increase annual revenues by $30.2 million; also natural gasrates increased by an average of 1.7%, which is intended to increase annualrevenues by $3.3 million.

This is based on a rateof return of 8.2%, with the common equity ratio of 46% and a 10.2% return onequity. We believe the outcome of this rate case strikes a fair balance betweenthe interests of all parties and provides a reasonable outcome for ourcustomers and our shareholders.

In October 2007, we fileda natural gas general rate case in Oregon. In this general rate case, we have requested toincrease natural gas rates to our Oregon customers by an average of 2.3%, which isdesigned to increase annual revenues by $3 million.

In December 2007, weentered into a settle agreement with all parties, including the staff of thePublic Utility Commission of Oregon, the Citizens’ Utility Board, and theNorthwest Industrial Gas Users to resolve the cost of capital components of therate case.

In the settlement, theparties agreed to a rate of return of 8.2%, with a common equity ratio of 50%,and a 10% return on equity. The settlement agreement does not concern any otherrevenue requirement or rate-related issue. We are currently in settlementdiscussions related to the remaining issues of the case.

We will continue torequest rate adjustments as necessary in the future to recover our capital andoperating cost and to align earned returns with those authorized by regulators.We’re planning to file a generate rate cases in both Washington and Idaho some time in the next few months.

Over the next few years,we’re planning for significant growth in our utility infrastructure. For 2007,our capital expenditures were approximately $206 million. For 2008, our capitalbudget will be approximately $200 million and we are expecting our capitalbudgets to exceed $200 million in 2009 and 2010.

The future investments wewill be making are in traditional utility plant that will be used to provideservice to our retail customers. We also anticipate upgrading some of our hydroprojects, and we will continue to reinforce and expand our natural gas andelectric distribution systems.

I’m pleased to reportthat we’re close to completing the acquisition of a wind generation site. Weexpect to construct a 50-megawatt generation facility in 2010 or 2011, at anestimated cost of approximately $120 million. This amount is not included inour estimate of capital expenditures in 2010.

As we reported in October2007, we settled a lawsuit that the State of Montana had filed against us demanding lease payments forriverbeds underlying our hydroelectric projects on the Clark Fork River.

We’ve agreed to pay Montana $4 million per year for the next 10 years; thesepayments will be adjusted annually for inflation. After 10 years we’ll workwith the State of Montana to negotiate an appropriate lease payment for theremaining term of our FERC license, which expires in 2046.

We’ve asked ourregulators to allow us to place these expenditures into a regulatory assetaccount for future recovery, including an appropriate carrying charge. TheWashington Commission granted this request; the Idaho Commission approved thedeferral for future recovery, but deferred ruling on a carrying charge untilthe next rate case.

For 2007, ourhydroelectric generation was 96% of normal. Based on the most recent availablesnowpack data for the drainages that feed at Clark Fork and Spokane rivers, we’re forecasting hydro generation to beslightly above normal for 2008.

Improved hydro generationcoupled with the reset of base level of power supply cost in the ERM in ourgeneral rate case, should improve results for 2008 as compared to 2007.

Many of you have probablyheard that eastern Washington and northern Idaho received significant amount of snowfall in Januaryand early February. As you can see on the slide, the drainages feeding this Spokane River are well above average. The drainages feeding the Clark Fork River, which feed our largest hydro facility, are slightly above averagefor this time of the year.

In terms of snow waterequivalent, which is what we focus on, the Spokane River Basin including theCoeur d’ Alene and St. Joe rivers are about 125% normal. The Clark Fork River Basin has about 110% of normal snow water equivalent sofar this year. This is good news, and certainly a vast improvement over lastyear.

However, I’ll also offera word of caution. First we still have several weeks of our important snowaccumulation period to go. The forecast for that period is optimistic, but I’llfeel better when it becomes a reality.

And second, how valuablethat snowpack is in terms of electricity generated depends on when the snowmelts. We’re pleased with the position that we are in, but until we actuallyturn all that snow into electricity, we’re going to be a bit cautious regardingthe benefit of the situation.

Our forecast for 2008generation will be revised based on precipitation, temperature and othervariables during the year. We regularlyupdate generation forecast, as snowpack and stream flow information is measuredthroughout the year.

And now I’ll turn thispresentation over Malyn Malquist for an update on the financial results foreach segment of our business, our financing activities and our earningsguidance.

Malyn K. Malquist

Thanks, Scott, and goodmorning, everyone. Avista Utilitiescontributed $0.23 per diluted share for the fourth quarter of 2007 compared to$0.28 per diluted share for the fourth quarter of 2006. The decrease in results reflects an increasein other operating expenses and taxes other than income taxes.

Depreciation andamortization also increased as compared to the prior year due to our investmentin utility plant beyond the level that was being covered in rates. Our utility plant in service increased $193million during 2007.

For the full year of2007, our utility operation contributed $0.82 per diluted share compared to acontribution of $1.16 per diluted share for 2006. The decline in our results for 2007 ascompared to 2006 was primarily due to a decrease in electric gross margin.

The decrease was also dueto the disallowance of $3.8 million of unamortized debt repurchase costs in theWashington general rate case and an increase in otheroperating expenses, as well as depreciation and amortization.

Electric resource costswere higher than the amount included in base rates in 2007. This was largely driven by higher purchasepower costs and fuel costs and greater use of our thermal generating resourcesto meet demand in the early part of the year. Also, hydro generation was below normal, and we experienced someunexpected outages at our generating plants in the second quarter.

We recognized $8.5million of expense under the ERM during 2007 as compared to a $2.6 millionbenefit recognized during 2006. This change from the prior year reduced our earnings by$0.14 per diluted share. The ERM is onlythe Washington fuel recovery mechanism; we also under-recoveredin Idaho.

In addition to the effectof the ERM, our electric and natural gas loads were below ourexpectations. This was due to warmerthan normal weather during the heating season; lower than expected customergrowth; and customer response to price increases particularly with respect tonatural gas.

Also contributing to theyear-to-date decline in utility earnings was an increase in other operatingexpenses. A variety of factorscontributed to this increase, most notably the impairment of a turbine in thethird quarter as well as increased maintenance costs, regulatory commissionfees, and outside services.

On the favorable side,our 2007 interest expense was lower than 2006. This was due to our issuance in the fourth quarter of 2006 of fixed ratelong-term debt that replaced maturing debt with higher interest rates and adecrease in interest expense on short-term borrowings under our committed lineof credit. The decrease in short-termborrowing interest was due in part to the availability of funds from the AvistaEnergy transaction.

The Energy Marketing andResource Management segment, which was substantially comprised of AvistaEnergy, had a net loss of $0.22 per diluted share for 2007 compared to acontribution of $0.23 per diluted share for 2006.

These lower-than-expectedresults from Avista Energy were primarily due to underperformance on the powerside of the business and the loss on the sale of substantially all of AvistaEnergy’s contracts and ongoing operations to Shell Energy.

Turning to Advantage IQ,the company’s net income for the fourth quarter and fiscal year 2007 was slightlyhigher than the respective periods of 2006 due to an increase in operatingrevenues as a result of customer growth and an increase in interest earnings onfunds held for customers.

This was partially offsetby increased operating costs, which included expenses for consulting servicesrelated to long-term strategic planning for the business incurred during thesecond and third quarters of 2007.

As previously mentioned,we brought in advisors to examine current and future markets and the best wayto grow the business to maximize our shareholder value. This additional work is designed to enhancethe long-term profit potential of Advantage IQ.

In our other businesses,our results improved over the prior year as measured on both the quarterly andyear-to-date basis. This was due in partto net gains on certain legacy venture fund investments in 2007 compared to netlosses in 2006.

Over time, asopportunities arise we plan to dispose of assets and phase out operations thatdo not fit with our overall corporate strategy. However, we may invest incremental funds to protect our existinginvestments and invest in new businesses that fit with our overall corporatestrategy.

With respect to cashflows, during 2007, positive cash flows from operating activities and proceedsfrom the Avista Energy transaction were used to fund our cashrequirements. These cash requirementsincluded utility capital expenditures of $206 million; mandatory preferredstock redemptions of $26 million; debt maturities of $27 million and dividendsof $31 million.

We have long-term debtmaturities of $318 million in 2008. Thisincludes over $270 million of 9.75% notes that mature on June 1 of 2008. We will issue new securities to fund a significantportion of these requirements. However,the new debt should be issued at a substantially lower rate.

We continue to makeprogress in strengthening our financial health. This progress was recognized by the credit rating agencies who have allupgraded one or more components of our debt over the past nine months.

Importantly, Moody’s andStandard & Poor’s recently upgraded our corporate credit rating toinvestment grade. Although we arepleased with this accomplishment, it is important to note that we are at thelower end of the investment grade category, and will continue to work towardimproving our ratings.

As we have indicated inpast calls, management intends to recommend that the Board consider graduallyincreasing the dividend payout ratio to become more inline with the averagepayout ratio for the utility industry, which currently is approximately 60% to70% of earnings. Based upon an annualdividend rate of $0.60 per share and our current earnings guidance for 2008,our payout ratio would be about 40% to 45%.

We’re pleased to announcethat at our Board meeting last Friday, the Board voted to raise the quarterlydividend from $0.15 to $0.165 or 10% effective with our next dividendpayment. This action is indicative ofour significant progress, and our confidence in the results that we willproduce in 2008 and beyond.

The Board also believesthat it is important to recognize our shareholders loyalty to the companydespite poor returns during 2007. Management intends to recommend that the Board further review our dividendlevel during the second half of 2008.

The Board considers thelevel of dividends on a regular basis, taking into account numerous factorsincluding financial results, business strategies and economic and competitiveconditions. The declaration of dividendsis within the sole discretion of the Board.

As you’ll recall, inDecember of 2006 we entered into a sales agency agreement to issue up to 2million shares of our common stock from time-to-time. During the second half of 2008 we areplanning to issue common stock under the sales agency agreement in order tomaintain our equity ratio at an appropriate level.

The issuance of commonstock should also help us maintain or improve upon certain financial metricsnecessary to maintain or improve our credit ratings. These plant issuances were incorporated intoour 2008 earnings guidance.

Also at the meeting lastFriday the Board promoted Ann Wilson to Vice President, Finance for thecompany. She will retain her currentrole as Treasurer for the company and brings exceptional knowledge and talentto this position. She is very wellqualified to take on this kind of leadership role, as we continue to focus onimproving the financial strength of our company.

I’d like to make a fewcomments about our service territory economy. Our regional economies continue to grow faster than the national averagewhen measured by job and population growth. Although the growth rate has slowed down a bit in our Oregon service territory, eastern Washington and north Idaho are adding workers at a rapid clip.

In fact the Coeur d’Alene, Kootenai County area was the fastest growing metro area last year the sixth fastest growing state in thecountry. A few decades ago, commoditieslike lumber, agriculture and mining were the primary industries in our serviceareas. Recent strong prices for wheatand metals have led to a resurgence of those industries, although lumberactivity is soft due to the national housing slowdown.

Speaking of housing, ourservice territory is not suffering as much as other parts of the countrybecause our job growth has kept the housing market in balance and foreclosures incheck.

Our service areaeconomies are well diversified today with healthcare, education, finance andtourism providing an important balance, and our regional manufacturers areseeing strong sales to the Seattlearea and exports to Canada, Mexico, plus Europe and Asia.

We are confirmingguidance for consolidated earnings for 2008 to be in the range of $1.35 to$1.55 per diluted share. The companyexpects Avista Utilities to contribute in the range of $1.20 to $1.40 perdiluted share for 2008.

The outlook for theutility assumes among other variables, normal precipitation, temperatures andslightly above normal hydroelectric generation. These factors, combined with resetting the ERM in the Washington general rate case are expected to result in abenefit under the ERM in 2008.

As we did last quarter, Iwant to lead you through the changes in earnings levels we anticipate from 2007 to2008 that are allowing us to reaffirm our guidance for these utilities for 2008to be in the range of $1.20 to $1.40.

It’s important to notethat these are rough broad estimates that allow us to confirm our guidance inan appropriate range, but of course things can happen that cause variances inall of these categories.

Let’s start with 2007utility earnings of $0.82; start by adding back $0.08 for the combinedwrite-down of the turbine and the disallowance of the debt repurchasecost. Next, we’re expectingapproximately a $0.50 increase at the gross margin level in 2008. This increase is driven by a number of itemsincluding the Washington general rate case, the assumption of slightlyabove normal hydro, and a year-over-year increase in our loads.

Remember in 2007 weabsorbed $8.5 million or $0.10 related to the Washington ERM. We’re slightly above normal hydro and theresetting of the authorized power supply costs in 2008. We do not expect tohave this expense. In fact, we areexpecting a benefit.

Additionally, we areassuming a decrease in interest expense of approximately $0.15 in 2008primarily based on the retirement of high cost debt. And finally, we’re expecting approximately$0.25 of increased operating and maintenance costs including depreciation andtaxes. The final result of all theplusses and minuses leads us to $1.30, the mid-point of our earnings guidancefor 2008.

We are revising ourguidance for Advantage IQ downward to a range of $0.10 to $0.12 per dilutedshare from a range of $0.13 to $0.15. When we prepared our budget for 2008, which is the source of ouroriginal guidance, the fed funds rate had just been reduced to 4.75% from5.25%. Our budget assumes that the fedfunds rate would be lowered during 2008 another 25 basis points to 4.5%.

Obviously, the fed hasbecome much more aggressive and our assumption was incorrect. Lower short-term interest rates decreaseAdvantage IQ’s interest earnings on funds held for customers. Our new earnings guidance assumes that thefed funds rate will be lowered to 2.5% in March and held there the balance ofthe year.

This results in a muchlower average flow yield in 2008 as compared to our average yield of 5% in2007. We are not revising ourconsolidated guidance. We expect theother businesses to be between break-even in a loss of $0.03 per dilutedshare.

Now with that I’ll turnthe call back to Jason.

Jason Lang

Thanks, Malyn. And now at this time we’ll open the call upfor questions.

Question-and-Answer Session

Operator

(Operator Instructions)And your first question is from the line of Paul Ridzon - KeyBanc.

Paul Ridzon - KeyBanc

Just wanted a little moredetail; one of the places I got caught by surprise was the tax timing issues atthe utility for other taxes, and what was driving that year-over-yeardiscrepancy? At the end of the year it all makes sense and probably you shouldhave seen it coming.

Christy Burmeister-Smith

Good morning. In the fourth quarter of 2006, we had anunusual reduction in property tax. It was primarily in Idaho and it related to the Idaho state law changing, they rolled back sales tax and they rolledback property tax and replaced it with sales tax.

What that did is cause usin 2006 to adjust our accrual downward. The results saw a small impact in Montana, so in 2006, we had about $3 million pre-taxadjustment in the fourth quarter. Year-over-year our property tax is just the same at about $20 million.

Paul Ridzon - KeyBanc

Pre-tax would be the sameas after-tax in this case?

Christy Burmeister-Smith

As a property tax itwould be tax affected of about 65%, so about $2 million after tax.

Paul Ridzon - KeyBanc

And, Malyn, we have asurprise dividend hike this quarter. I am sure shareholders appreciate that butgoing forward should we think about the August Board Meeting at the time whenthey’ll visit this every year?

Malyn Malquist

I think that it will bedone in the second half of the year, and what we’re shooting for as you’llrecall was getting the investment grade credit rating back and refinancing the 9¾% notes and of course the 9 ¾% notes are going to happen in the secondquarter, so I won’t predict which quarter the Board will do that in Paul, but Ithink that they’ll be in a position to look pretty hard at it in August.

Paul Ridzon - KeyBanc

And certainly otherindustrial sectors are having troubles in the debt markets; what are you seeingout there? How are the spreads and what’s your outlook for the refi on the 9 ¾%?

Malyn Malquist

It’s certainly a lot morevolatile than we’d like it to be and we’re hoping that things will calm down abit, the spreads have blown out pretty significantly for us but we’re stillanticipating we’re going to see a very substantial savings versus the 9 ¾% thatwe have.

We’re looking at probablydoing $250 million of debt sometime in the March to May timeframe. And we’re looking at rates still I think thatare lower than 7% if we went really long and probably in the low 6% if we wentwith ten-year which is what we’re leaning towards at this point. Ann, would youadd anything to that?

Ann Wilson

No, I think that we’retrying to go with as plain vanilla as possible. So, that’s why we’re looking atsecured first mortgage bonds.

Paul Ridzon - KeyBanc

Yes, your ERM was reset;what’s the embedded power price in 2008 versus that which was in 2007?

Malyn Malquist

Paul, I think we’re goingto have to get back to you with that. We don’t have that right off the top.Kelly?

Kelly Norwood

We don’t really set aspecific rate per kilowatt-hour for power supply, what we do is reflect in ourbase rates the known contracts, fuel cost, levels of hydro and wholesale marketprices in our base rates. So, it’s a combination of numbers that make up thatbase set of numbers. So, there isn’t any specific rate per kilowatt-hour that’sseparately determined.

Paul Ridzon - KeyBanc

One another thing thatsurprised me was with 96% normal hydro, we still incurred $8.6 million of ERMcosts. Is that just proportion or was there something unusual about this yearthat let the ERM get so high even with water that close to normal?

Malyn Malquist

I think that there were acouple of things, first we did have some outages at our hydro facilities in May-Junetimeframe, and I think that was harmful to us. Also we knew and what we’retrying to do with the PCORC was reset natural gas price and the purchase powerprice to be closer to market.

And I don’t recall whatthose were, but I do remember that that was a fairly significant piece ofsomething that we needed from the Commission so that our prices reallyreflected the market and we obviously weren’t unable to true those up. So, Ithink it was a lot more than just the hydro, I think it was the natural gasprice, maybe even more than the lower than normal hydro.

Scott Morris

And Paul, we did have anoutage at Coyote Springs unexpectedly for two to three weeks in the spring thatadded to the expense as well.

Paul Ridzon - KeyBanc

I just have one morequestion. It’s in IQ; you’ve got a lot of intellectual property in thatbusiness. It looks as though efficiency in DSM markets are probably going to beattractive. What do you see as your opportunities to pick your market leadingposition, and potentially pursue other strategic opportunities around thatbusiness and growing in that way?

Scott Morris

Paul, as you know thatwe’ve been really focused on not only just growing our core business of thebill pay operation, but also really focused on consulting services. And wecurrently have a pretty aggressive plan around increasing those services to ourcustomers.

We did very well in 2007,had a significant increase in revenues in consulting services, and see somevast opportunities and exciting opportunities for us in 2008. So, you’reexactly right, we will get pretty aggressive in the DSM and green initiativesthat are opportunities for us to expand into. So, you can look forward to that.

Paul Ridzon - KeyBanc

Is there a lot of capitalthat you’re going to need to do that?

Scott Morris

No, we’ve got great, as yousaid, intellectual capital; we’ve got tremendous IFIT capability, it’s justbeing able to repackage and work closely with our customers. And we know whattheir needs are, and are looking at ways to help them reduce their carbonfootprint and offer other new products into the market.

Malyn Malquist

We do have, Paul, we dohave about $6 million to $7 million of CapEx in Advantage IQ which will befunded from their operations, so there is no requirement to put additionaldollars in there.

We’re basicallyrebuilding our processing engine, which is our own propitiatory engine, andfrankly we’re trying to get ready to process hundreds of thousands more billsper month than we’re currently processing as well as help us to bring someadditional efficiencies in the long-term there.

So, all of those things,in addition to the growth in other areas like consulting and telecom that Scotttalked about, should really help us to take this business to the next level.

Paul Ridzon - KeyBanc

Great, thank you again.

Operator

Your next question comesfrom the line of James Bellessa - D.A. Davidson & Company.

James Bellessa - D.A. Davidson & Company

On the fourth quarter yousay that the utility came in lower than you originally forecasted, was thatjust exclusively the tax timing issues or were there other items? You talked about $0.5 million more ofabsorption than you thought; are there other items than those two things?

Christy Burmeister-Smith

Yes, there were a coupleof additional items. We had some increased maintenance costs partly related toan outage at Colstrip; we had a little bit increase in (inaudible) expense thathad been included in our rate case that we should up (inaudible).

Also in 2006 in operating expenses we had a settlement related toour Northeast turbine sale, which had reduced 2006 operating expenses byapproximately $1 million pre-tax. So, those are the primary items of that;that’s the difference between 2007 and 2006.

James Bellessa - D.A. Davidson & Company

Now, is this tax issueone-time adjustment or is this going to go forward somehow?

Christy Burmeister-Smith

Proper tax year-over-year2007 to 2006 is approximately the same level at $20 million. We anticipate thatit will be a similar amount in 2008. There can be a little bit of difference inthe timing of (inaudible) adjustments that are made, depending on when we getinformation from the Jackson Authorities, but it shouldn’t be as significant asit was in 2006.

James Bellessa - D.A. Davidson & Company

And the sales tax figurefor this year of 2007 would be the same in 2008?

Christy Burmeister-Smith

When you say sales taxare you talking about taxes associated with our revenue?

James Bellessa - D.A. Davidson & Company

I thought you said thatin Idaho they decreased the property taxes, and replacedit with the sales tax.

Christy Burmeister-Smith

Correct and property taxhas a much greater impact on us than sales tax in Idaho.

Malyn Malquist

I would just maybe try toframe up the 2007 fourth quarter was a continuation of really our rates notreflecting our costs. And so, with the Washington general rate case we expect that is behind usnow, because our rates now our really are much more indicative of what ourcosts are.

James Bellessa - D.A. Davidson & Company

In the fourth quarter theERM absorption was that $0.01 or $0.02 a share?

Christy Burmeister-Smith

That’s approximately$0.01 per share.

James Bellessa - D.A. Davidson & Company

And that’s about flatwith the year even though the dollar amount is up it’s still about $0.01 versus$0.01?

Christy Burmeister-Smith

Correct.

James Bellessa - D.A. Davidson & Company

And in the delta that youwere explaining about earnings levels in 2008 versus 2007, did you say thatdebt in turbine write-down was $0.10 in 2007?

Malyn Malquist

It was $0.08.

James Bellessa - D.A. Davidson & Company

Thank you very much.

Operator

(Operator Instructions)And your next question is from the line of Brian Russo - Ladenburg Thalmann.

Brian Russo - Ladenburg Thalmann.

What income tax rate areyou are assuming in the 2008 earnings per share guidance?

Christy Burmeister-Smith

Off the top of my head, Ithink it’s around 37%.

Brian Russo - Ladenburg Thalmann.

Okay. And anymore detailson the upcoming Washington rate case filing; I think you mentioned a few monthsfrom now, any way to narrow that timeframe down, and then also any expectationson the reinstatement of the PCORC?

Kelly Norwood

We do plan to file orexpect to file in Washington by the end of the first quarter. We haven’t set adate, but that’s our expectation at this point in time.

In terms of the PCORC, inthis last filing with rates effective January 1 of 2008, as Malyn mentioned wedid reset the base power supply cost; that was one of our objectives in proposinga PCORC was to be able to keep that base power supply cost updated on a regularbasis.

With this filing in thefirst quarter of this year, it should allow us to reset the base for 2009, andas long as we can keep that base updated there is less of a need for a PCORC.So, there is no plan at this point to continue to pursue that PCORC.

Brian Russo - Ladenburg Thalmann.

Okay. So, in terms ofreaching the settlement or an outcome on the upcoming Washington filing, you would hope to have new rates ineffect in early 2009; is that correct?

Kelly Norwood

That’s correct. Yes.

Brian Russo - Ladenburg Thalmann.

Okay. And then lastly howlong was the Colstrip outage, and how much expense did you incur on that?

Malyn Malquist

Brian, we’ll have to get backto you, it was not significant as far as linked or expense. But, I need to getback to you on the number because I don’t have it off the top of my head.

Brian Russo - Ladenburg Thalmann.

Okay, thank you verymuch.

Operator

You have a follow-up questionfrom the line of Paul Ridzon - KeyBanc.

Paul Ridzon - KeyBanc

Do you have any sense ofa timeline on Oregon, when we could get those rates implemented?

Kelly Norwood

Yes. We right now are inthe middle of discussions with the Commission staff and the other parties onresolving that case. As we indicated we do have an all-party settlement on thecost of money. The staff testimony is due on the 28 of this month in that Oregon case. So, we’re hopeful that we’ll be able toresolve those issues with the parties; several discussions are ongoing now.

Paul Ridzon - KeyBanc

What you’ve agreed on iscapital structure, ROE; have you agreed on rate base?

Kelly Norwood

I have not, just the costof money component, cap structure and the cost of those components.

Paul Ridzon - KeyBanc

Thank you again.

Operator

You have anotherfollow-up question from the line of James Bellessa - D.A. Davidson &Company.

James Bellessa - D.A. Davidson & Company.

In your guidance you usethe assumption of slightly above normal hydroelectric generation, and you wentthrough a description of what the water content was. It sounded above normal;well above normal not just slightly above. Why is hydroelectric generation justslightly above?

Scott Morris

Jim, a couple things justto refresh your memory. On the Spokane River, it’s run of the river; we don’t have significant reservoirs. So, wereally get the water whenever it runs off. A lot of this Spokane snowpack is in some lower elevations as well. So,while it’s 125% normal you can only get so much through the Spokane River dam system.

On the Clark Fork system, again, we’re optimistic, it’s abovenormal; the snow-water equivalent to 110%. So, lot of it’s going to depend onhow it melts, when it melts, and how the run-off forms. And as you know, itreally depends on do we have a cool wet spring or does it get warm fast.

So, as you know, and LaNina, as we said we’re optimistic, the long-term weather reports say that it’ssupposed to continue to be wetter than normal and average normal temperatures.So, assuming we don’t get a real hot streak and things proceed as usual, we’rehopeful that that run-off on the Clark Forkhopefully extends into June-July, but we don’t know that until we get there.

James Bellessa - D.A. Davidson & Company.

Your Advantage IQguidance went down, and you talked about lower short-term interest rates. Doyou have something that can give us some help about what your average realizedinterest return was on the float during 2007, and what your assumption is for 2008?

Scott Morris

During 2007, our averagereturn on our daily balances was around 5%. And while we’re off to a decentstart this year, because we had our investments locked in at the end of theyear, so January looked pretty good. But we’re expecting that starting with thesecond quarter, we’re going to basically be yielding about 2.5%.

So, for nine months ofthe year we’re going to basically see a float rate about half of what we sawlast year. Now, the good news is we’re adding more customers, and so balancesgo up for that. Also most utilities are seeing their rates increase, so ourbalances are going up for that, so there is a little bit of an offset there.

But, a significantreduction from 5% to 2.5%, and that pretty much flows right to the bottom line.So, that’s definitely going to hurt us for the year, and that’s why we feltlike we had to pull our guidance even though we still feel very, very positiveabout this business.

James Bellessa - D.A. Davidson & Company.

Does the float show up inyour cash item on your assets and your balance sheet?

Malyn Malquist

We do have a line thatis...

Ann Wilson

Funds held for customers.

Malyn Malquist

Funds held for customers;thanks, Ann.

James Bellessa - D.A. Davidson & Company.

And I’m looking down; I’mnot seeing that immediately. How far down do I have to go?

Ann Wilson

Let me look here for asecond, Jim, and I’ll find it.

James Bellessa - D.A. Davidson & Company.

Can you characterize themagnitude of the size of those funds held for customers?

Malyn Malquist

Our average dailybalances can be well above $100 million. Our customers fund the money and weimmediately write a check or wire a transfer, but we still nevertheless havesignificant amounts of funds especially this time of year.

James Bellessa - D.A. Davidson & Company.

And can you give us apicture of how those funds may have increased over the last couple of years? Isit increasing about the same as your revenues?

Malyn Malquist

The answer is yes,perhaps even a little bit above the revenues because of the fact that utilityrates have been going up.

Ann Wilson

Jim, that amount isincluded with other current assets on the balance sheet that’s in front of you.And it’s roughly $90 million.

James Bellessa - D.A. Davidson & Company.

Thank you.

Operator

That concludes theQ&A session. And now I’d like to turn the call back to Jason Lang forclosing.

Jason Lang

Thank you all for joiningus today. We certainly appreciate your interest in our company. Have a greatday.

Operator

Thank you for yourparticipation in today’s conference. This concludes the presentation.

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