Avista Corporation (AVA)

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Avista Corporation (AVA)

Preliminary Q3 2012 Earnings Conference Call

October 23, 2012 11:00 AM ET

Executives

Scott L. Morris - Chairman, President and CEO

Mark T. Thies - SVP and CFO

Dennis P. Vermillion - SVP and President Avista Utilities

Kelly Norwood - VP of State and Federal Regulation

Christy Burmeister-Smith - VP Controller and PAO

Jason Lang - IR Manager

Analysts

Michael Klein - Sidoti & Company, LLC

Paul Ridzon - Keybanc Capital Markets Inc

James von Riesemann - UBS Investment Bank, Research Division

Brian Russo - Ladenburg Thalmann & Co.

Michael Worms - BMO Capital Markets

Michael Bates - D.A. Davidson & Co.

Presentation

Operator

Welcome to the Pre-earnings Conference Call. My name is Eric. 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.

I will now turn the call over to Jason Lang, Investor Relations Manager.

Jason Lang

Thanks, Eric and good morning, everyone. Welcome to Avista’s conference call with respect to preliminary results for the third quarter and year-to-date 2012, the lowering of 2012 earnings guidance and the initiation of 2013 earnings guidance. This information was released pre-market yesterday 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 of 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 to our Form 10-K for 2011 and our Form 10-Q for the second quarter of 2012, which are available on our website.

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

Scott L. Morris

Thanks, Jason and good morning, everyone. I want to start with the fact that our preliminary results for the third quarter and forecasted results for the remainder of 2012 are below our expectations, and we have lowered our consolidated earnings guidance for the year. This is primarily due to the weak results at Ecova, as well as losses at our other non-utility businesses.

We continue to expect our 2012 utility results to be at the lower end of our original guidance range and Mark Thies is going to give you some of those details in just a minute.

On October 11, 2012 we filed electric and natural gas general rate cases with the Idaho Public Utility Commission. We’ve requested an overall increase in billed electric rates of 4.6% and an overall increase in billed natural gas rates of 7.3%. The filings are designed to increase annual electric revenues by $11.4 million and increase annual natural gas revenues by $4.6 million. Our requests are based on a proposed overall rate of return of 8.46%, with a common equity ratio of 50% and a 10.9% return on equity.

We are pleased to have reached a settlement with certain parties in our Washington general rate case. We believe the settlement provides a framework for positive outcomes for both our customers and shareholders for the next two years.

So now what I’d like to do is just turn this presentation over to Kelly Norwood and let Kelly provide you with the details of the Washington rate case settlement.

Kelly Norwood

Thanks, Scott. The settlement agreement is approved by the Washington Utilities and Transportation Commission is designed to provide $19 million of additional revenue in 2013 and $15.4 million of additional revenue in 2014. The settlement provides for an authorized return on equity of 9.8% and an equity ratio of 47%. Although the determination of the electric and natural gas revenue increases in the settlement agreement for 2013 were black box settlement amounts.

There were a number of elements that were identified either in the settlement agreement itself or in the testimony filed by other parties that can be used to provide a general reconciliation of the major differences between our original revenue increase requests and the settlement amounts. For example, our original electric revenue increase request was $41 million, which was based on a 10.9% return on equity and a 48.4% equity layer.

The 9.8% return on equity and 47% equity layer in the settlement agreement would decrease the $41 million original electric request by approximately $12 million. Second, the parties to the case requested an update to the power supply costs expected for the 2013 rate year. Updated power supply costs are approximately $5 million lower than at the time of our original filing.

Third, in our original filing we’ve requested additional cost recovery of approximately $4 million through base rates or a change to the amount of the retail revenue credit used in the energy recovery mechanism. The settlement agreement adopts the change to the amount of the retail revenue credit in the Energy Recovery Mechanism and we will provide additional cost recovery for Avista through the ERM mechanism on a going forward basis. Therefore our original request should be reduced by $4 million.

And forth after our filing we discovered an error in a rate case adjustment related to federal income taxes in original filing and the correction reduces our original request by approximately $3 million. The total of these four items would reduce our original electric request by $24 million from $41 million to $17 million as compared to the settlement amount of $13.7 million.

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