Avista Corporation (AVA)

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Avista Corporation (AVA)

Q3 2008 Earnings Call Transcript

November 4, 2008, 10:30 am ET

Executives

Jason Lang – Manager, IR

Scott Morris – Chairman, President and CEO

Malyn Malquist – EVP

Mark Thies – SVP and CFO

Kelly Norwood – VP, Regulatory Affairs

Christy Burmeister-Smith – VP, Controller and Principal Accounting Officer

Analysts

Brian Russo – Ladenburg Thalmann

David Thickens – Deephaven Capital Management

Hasan Doza – Luminus Management

Oliver King – Zimmer Lucas

Patrick McGlinchey – Sidoti & Company

James Bellessa – D.A. Davidson & Company

Chris Ellinghaus – Shields and Company

Timothy [ph] – KeyBanc

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Avista Corporation earnings conference call. My name is Heather and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session at the end of the conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Jason Lang, Manager, Investor Relations. Please proceed, sir.

Jason Lang

Thank you, Heather. Good morning, everyone. Welcome to Avista's Third Quarter 2008 Earnings Conference Call. Our earnings were released premarket this morning and the release is available on our Web site at avistacorp.com.

Joining me this morning are Avista Corp. Chairman of the Board, President and CEO Scott Morris; Executive Vice President, Malyn Malquist, Senior Vice President and CFO, Mark Thies; Vice President of Finance and Treasurer, Ann Wilson and Vice President, Controller and Principal Accounting Officer, Christy Burmeister-Smith.

Before we begin I would like to remind you that some of the statements that will be made today are forward-looking statements that involve 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 I would direct you to our Form 10-K for 2007 and Form 10-Q for the quarter-ended June 30th 2008, which are available on our Web site.

To begin this presentation I would like to recap the financial results presented in today's press release. For the third quarter of 2008, our consolidated net income was $0.13 per diluted share, compared to a net loss of $0.07 per diluted share for the third quarter of 2007. On a year-to-date basis our earnings were $1.04 per diluted share compared to $0.45 per diluted share for the first nine months of 2007.

Now I'll turn the discussion over to Avista's Chairman of the Board, President and Chief Executive Officer, Scott Morris.

Scott Morris

Thank you, Jason, and good morning, everyone. Overall, we are pleased with our results for the third quarter and the first nine months of 2008. Our financial results for the first nine months of 2008 have positioned us to meet the earnings targets we set for this year.

We expect continued improvement in our financial results due to the implementation of a general rate increase in Idaho which was effective October 1st. The general rate increase in Washington implemented at the beginning of 2008 with the primary reason for the improvement in our utility performance.

In addition to the improvement at the utility, our consolidated results improved as compared to 2007 due to the net loss at Avista Energy in 2007.

Contributing to the improvement in utility results for the third quarter of 2008 as compared to the third quarter of last year was lower electric resource costs as compared to the amount included in base rates.

We had a benefit of $100,000 in the third quarter of 2008 as compared to an expense of $5.2 million for the third quarter of 2007 under the energy recovery mechanism in Washington. This was primarily due to improved hydroelectric generation and resetting the base level of power supply costs in the Washington general rate case.

On a year-to-date basis we have absorbed $7.3 million of costs under the ERM compared to $7.6 million in 2007. Despite a good winter snow path, the late spring run off resulted in excess water being spilled which yielded lower than normal hydroelectric generation for the first nine months of 2008.

Purchase power costs were higher than expected due in part to colder than normal temperatures during the heating season and an increase in the price of wholesale power. Although we had above normal hydro generation from mid-May through September it was not enough to make up the entire shortfall from earlier in the year. Actual hydroelectric generation for the year will depend on precipitation, temperatures and other variables during the fourth quarter.

It's important to note that the amounts recognized under the ERM can vary significantly from quarter-to-quarter due to a variety of factors including the level of hydroelectric generation as well as changes in purchase power and fuel costs.

However, we have limited downside earnings risk for the fourth quarter of 2008 as we are currently in the 90% customer, 10% company sharing band under the ERM due to power supply costs exceeding the amount included in base rate by over $10 million on a year-to-date basis.

Partially offsetting the negative effect of higher electric resource costs on a year-to-date basis was higher than expected retail natural gas flows due to colder than normal weather during the heating season earlier in the year.

Also contributing to the increase in income was $5.7 million of interest income related to income tax settlements for the company's 2001 through 2003 tax year which included the settlement of the indirect overhead cost issue. This was partially offset by $1.4 million of interest expense related to income tax settlement for the 2004 and 2005 tax years. Both amounts were recorded during the third quarter of 2008.

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