Oct 23, 2012
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.
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.
As part of our original electric general rate case request of $41 million, we proposed an attrition adjustment to address the annual revenue shortfall related to the regulatory lag we’ve been experiencing in the state of Washington. The requested attrition adjustment was approximately $20 million of the $41 million total revenue increase request.
Although a specific attrition adjustment was not identified or agreed to in the settlement agreement, the results of the settlement agreement is approved by the commission would represent meaningful incremental improvement in addressing the regulatory lag problem in Washington. The settlement of course represents a compromise on many contested issues.
As part of the settlement, we’ve agreed that we will not file a general rate case in Washington that would cause an increase in base retail rates before January 1, 2015. We can’t file prior to January 2015, that new rates from the filing could not be implemented prior to January 1, 2015.
Now I will turn this presentation over to Mark Thies.
Mark T. Thies
Thanks, Kelly. Good morning, everyone.
Our preliminary consolidated earnings were $0.10 per diluted share for the third quarter of 2012 compared to $0.18 for the third quarter in 2011. On a year-to-date basis, our preliminary consolidated earnings were a $1.06 per diluted share for 2012 compared to a $1.30 for 2011.
Utility earnings for the third quarter increased slightly from the prior-year and the decrease in year-to-date utility net income was primarily due to increases in other operating expenses, depreciation and amortization, taxes other than income taxes and interest expense partially offset by an increase in gross margin. The increase in gross margin has been limited by the continued weak economy.
We will discuss further the actual results for the third quarter in a call on November 6. So I’m not going to go into many of the details here.
The decrease in net income for Ecova for the third quarter and year-to-date as well as forecasted for the remainder of 2012 was due primarily to slower than expected organic growth and Ecova’s expense management services and energy management services. In addition, Ecova experienced delayed implementation of new customers in its energy management services businesses.
In 2011, Ecova had an organic revenue growth of approximately 13% and we had expected a similar level in 2012. We are now expecting organic revenue growth for Ecova to be approximately 5% for 2012.
In particular, we’ve historically had strong growth in energy management services in the second half of the year and this is not materialized in 2012. Also growth in Ecova’s building management and facility optimization businesses has been slower than we had expected.
We believe that double-digit organic growth rates will return in the future albeit off a lower base of 2012 actuals. On our second quarter call, we confirmed our earnings guidance range of $0.16 to $0.19 per diluted share from Ecova in 2012.
We recognized that missing our targets by a significant margin hurts our credibility. However, we believe Ecova can hit its earnings targets in 2013 and I understand that based on the performance in 2012 it maybe skeptical, so we’re going to have to prove it.
The decline in results from our other businesses for both periods in 2012 as compared to 2011 was primarily due to losses on investments. This includes a $2.4 million pre-tax impairment of our investment in ReliOn, a fuel cell business and the write-off of our investment in GreenVolts, a solar energy company as well as increased litigation costs for the remaining contracts and previous operations of Avista Energy.
We’ve lowered our 2012 consolidated earnings guidance to a range of $1.50 to $1.60 per diluted share. Previously, we expected 2012 consolidated earnings to be at the lower end of the range of $1.65 to $1.85 per diluted share.
The revision to our 2012 guidance is primarily due to lower than expected earnings from Ecova and the impairment of investments and other costs at our other non-utility operations. We have narrowed our expectation for Avista Utilities' earnings contribution to be in a range of $1.51 to $1.58 per diluted share for 2012, which includes a benefit under the Energy Recovery Mechanism in Washington within the 90% customer 10% company sharing band.
Previously, we had expected the utility earnings to be at the lower end of the range of $1.51 to $1.66. It is important to note that the forecast of our position in the ERM can vary significantly due to a variety of factors including the level of hydroelectric generation and retail loads, as well as changes in purchased power and natural gas fuel prices.
Our outlook for Avista Utilities assumes, among other variables, normal precipitation and temperatures for the remainder of 2012. Certain programs are expected to be implemented at Avista Utilities in 2012 to achieve long-term cost savings.
The upfront costs of implementing such programs are not known at this time and are not included in our 2012 earnings guidance. We expect Ecova to contribute in the range of $0.05 to $0.07 per diluted share for 2012, a significant reduction from our previous guidance of $0.16 to $0.19 per diluted share.
We expect other businesses to be between a loss of $0.05 to $0.06 per diluted share, a reduction from our previous guidance of a break-even to a loss of $0.02. We are initiating 2013 guidance for consolidated earnings to be in the range of $1.70 to $1.90 per diluted share.
We estimate that our 2013 consolidated earnings guidance range encompasses a return on equity range of approximately 8.25% to 9%. We expect Avista Utilities to contribute in the range of $1.62 to $1.76 per diluted share in 2013.
Compared to 2012, we expect our utility earnings to be positively impacted by general rate increases. We expect our 2013 earnings to continue to be limited by slower load growth due to the economy, delay in the recovery of operating expenses and capital investments, as well as increased operating costs, including pension and other post-retirement benefits.
As such we’re implementing certain measures to manage our operating costs to a level of increase in the 3% to 4% range. Such measures includes scrubbing our budgets, evaluating all operating and maintenance activities, reprioritizing projects and the implementation of a voluntary severance program.
Our estimates indicate that we may need to reduce our O&M costs by as much as $40 million and that is included in our expectations. Our range for Avista Utilities encompasses expected variability in power supply costs and the application of the Energy Recovery Mechanism to that power supply cost variability.
The midpoint of our utility guidance range does not include any benefit or expense under the ERM. Our outlook for Avista Utilities assumes, among other variables, normal precipitation, temperatures and hydroelectric generation, as well as the implementation of the Washington general rate case settlement, which is subject to approval of the Washington commission, on January 1, 2013 is when we expect those rates to go into effect.
For 2013, we expect Ecova to contribute in the range of $0.10 to $0.14 per diluted share and the other businesses to be between break-even and a loss of $0.02 per diluted share. I will now turn the call back over to Scott.
Scott L. Morris
Thanks, Mark. I feel like we’re in a great position at our Utility.
We have a settlement which is still pending Commission approval that I believe provides an opportunity to improve returns to our shareholders and have a much stronger year in 2013. At Ecova, I know that we’ve missed our earnings targets for the year, but we still believe in this business and we will continue to look at ways to get the most value out of Ecova.
This could result in the sale of the business or in IPO in the future. And as Mark said, we have to prove that we’re going to hit our numbers in 2013.
So at this point, I’d like to open the call up for questions.
Operator
Thank you. We will now begin the question-and-answer session.
(Operator Instructions) And Michael Klein is on line with a question. Please go ahead.
Michael Klein - Sidoti & Company, LLC
Hi. Good morning, guys.
Scott L. Morris
Good morning, Mike.
Mark T. Thies
Good morning.
Michael Klein - Sidoti & Company, LLC
I just want to make sure I heard you correctly on the cost cutting measures, did you say that you think it could be as much as $14 million from O&M cost that you can remove?
Mark T. Thies
Yes. Based on assumptions as we look forward into ’13 and certain amounts of growth and request from all the different departments when we do our initial budgeting process and this is something that happens all the time as we ask for a significant amount then we try to work back to a 3% to 4% increase, but that is the number that we need to remove from the initial request.
Michael Klein - Sidoti & Company, LLC
Okay. And do you think that most of those cuts would be sustainable cuts going forward or maybe just short-term in nature?
Mark T. Thies
Our expectation is to make as many of them on a sustainable basis, so we have this opportunity with the settlement to stay out and to manage our business and to get those cut sustainable. There maybe some that will include some deferrals, but our expectation is to make as many as we can on a sustainable nature.
Michael Klein - Sidoti & Company, LLC
Sure, okay. And at the Ecova segment, can you just help maybe quantify or provide a little more color as to maybe was the shortfall primarily on the lack of organic growth or on some of the integration issues, was it kind of balance 50-50 between the two?
What really drove, I guess, the shortfall there?
Mark T. Thies
I’d say for the most part it was a reduction in the level of organic growth. We had experienced over the prior years significant organic growth and we continue to estimate that as we move forward and we – as those businesses grew and we continue to add staff to achieve that growth that growth slowed.
And we’re still getting organic growth and we believe that we will continue to get that organic growth, but it did slow. In addition, we found that the implementation we look at our bookings, in our pipeline of new business and we feel pretty good about it, but there is a – its been a delay in the implementation, so we will – we believe, we will get those revenues.
It just take a longer to get those revenues into our business and that slowed us significantly. We have historically also had strong in our utility side of the business, strong fourth – third and fourth quarters as Ecova Utilities get to their program years ending and try to get as much savings for their demand side management programs as they can.
We’ve seen historically a number of times since ’09 when we acquired Ecos that business had very strong end of the years and we’re now not expecting that as we’re not seeing those orders come in and that’s really the significant lowering from when – where we’re at in the second quarter to where we’re are today. That was the primary driver of that reduction in revenue.
The integration seem to be going fine. They take time with the two businesses and we might be off a little bit slightly from those, but we think those acquisitions were good, it will help our long-term growth and its really a delay in the revenue growth and the organic growth that we’ve seen.
Michael Klein - Sidoti & Company, LLC
Okay. Thanks a lot.
I’ll hop back in the queue.
Mark T. Thies
Thanks, Mike.
Operator
Our next question comes from Paul Ridzon. Please go ahead.
Paul Ridzon - Keybanc Capital Markets Inc
Was it $14 million you expect. Does that mean your O&M in ’14 will be – or ’13 will be $14 million less than ’12?
Mark T. Thies
No. We had again – as we looked at our preliminary budgets for ’13 we try to manage to 3% to 4% increase if we can or less.
We try to manage our businesses as effectively as we can, and we saw a significantly higher estimate for ’13, but we are going to manage that back to an increase of – in the 3% to 4% range over 2005 or 2012 actuals.
Paul Ridzon - Keybanc Capital Markets Inc
Okay. And does that – does your ’13 guidance include any cost for severance?
Mark T. Thies
No. And in fact we say that we have an expectation.
We had just announced a voluntary program that we expect to have the cost in 2012 not in 2013, and they’re not included, but I just don’t know what they are. We don’t know.
We just announced this yesterday and we don’t know what the impact of those costs are; we will, once we have knowledge of that we will tell you through an 8-K what those costs are, once we know what they are. But we don’t have any idea what they’ll be.
Paul Ridzon - Keybanc Capital Markets Inc
In that Ecova as your marketing folks go out and that obviously it didn’t generate the organic growth you thought, was there a common theme that you got from customers, I mean is the market getting saturated or are people’s budgets tightening. What's driving this?
Mark T. Thies
I don’t think so. Again, I think we had – we did have organic growth.
We had some higher expectations. Our growth when we look at our – or look at when we acquired the Eco’s business which had a lot of that utility relationship.
We’re still hitting our acquisition economics. It just slowed in 2012.
We were growing at a significant percentage, and so we kept forecasting that because we’ve seen that historically and then it just slowed. So that business is still on-track and we expect it to have good growth continue.
We’re going to slow the overall organic growth sum based on what we’re seeing and we think that we still will hit that low double-digit number off or be it off of 2012’s base. So we still see the opportunity for good growth there.
We just came back from the significant growth we had seen. We had to pare back from that.
Paul Ridzon - Keybanc Capital Markets Inc
And the 8.75% to 9% ROE, is that consolidated or is that at the utility?
Mark T. Thies
That’s on a consolidated basis.
Paul Ridzon - Keybanc Capital Markets Inc
Do you have the number for the utility?
Mark T. Thies
I did and I just did the range. We can look at that and we’ll have another call on November 6.
We can calculate it for that.
Paul Ridzon - Keybanc Capital Markets Inc
Okay. Thank you very much.
Mark T. Thies
I just did it on a consolidated range.
Paul Ridzon - Keybanc Capital Markets Inc
Thank you.
Mark T. Thies
Thanks Paul.
Operator
And our next question comes from Jim Von Riesemann. Please go ahead.
James von Riesemann - UBS Investment Bank, Research Division
Hi, good morning everyone.
Scott L. Morris
Hi Jim.
Mark T. Thies
Good morning, Jim.
James von Riesemann - UBS Investment Bank, Research Division
Couple of questions. One on this $14 million in cost cuts.
Is that a soft target or a hard target?
Mark T. Thies
Hard.
James von Riesemann - UBS Investment Bank, Research Division
Okay. And switching over to Ecova.
Can you define customer implementation for me?
Mark T. Thies
Well we get – we’ll sign new customers up and they have many sites as you know, I mean there are significant amount of sites. So we have to go through a process that we call on-boarding to bring those customers on to our system and to deploy the services, whatever services they happen to chose.
And so that takes some time and coordination and a lot of it – a lot of the impact has been in working with the customers to get them on to our program so we can start providing the services and generating the revenues. So we’ve got signed agreements, it’s just the implementation of that has taken longer.
James von Riesemann - UBS Investment Bank, Research Division
Okay. Second question and in a similar vein is, I didn’t hear anything about any customer attrition.
Did you lose any customers?
Mark T. Thies
Not any significant. We may had a slight loss, but we have not really – we’ve had a very strong retention and we continue to have that retention.
It’s really a growth issue.
James von Riesemann - UBS Investment Bank, Research Division
Okay.
Scott L. Morris
And Jim we did lose a few smaller deals on the utility side with a couple of states ending some programs. But I wouldn’t say that they were significant, but we did lose a couple on the utility side.
James von Riesemann - UBS Investment Bank, Research Division
Okay. And organic growth; you talked about double-digit organic growth.
Can you just define what maybe your long-term organic growth rate really is, I mean double-digit to me is 10% to 99%.
Mark T. Thies
We would be on the low end of that Jim.
James von Riesemann - UBS Investment Bank, Research Division
So that part I got.
Mark T. Thies
We’re expecting probably 10% or 11%. I don’t want to be aggressive there.
We do think it will be double-digit growth. We had 13% in ’11, but I would probably lower that to just say 10%, and if we can demonstrate more than that terrific.
We do believe, I mean double-digit growth is still good organic growth. That still creates value.
James von Riesemann - UBS Investment Bank, Research Division
Are you seeing any change in your margins there?
Mark T. Thies
No; we’ve seen some pressure on margins and pricing because it is very competitive. But we still have and we still post pretty strong margins.
James von Riesemann - UBS Investment Bank, Research Division
And then the last question I guess – thank you, and the last question is for Scott, and Scott you mentioned something about potentially spinning out or putting a public marker out there. What sort of pre-conditions need to occur for you to think one way or the other about doing so and what would the timing of the same be?
Scott L. Morris
Sure. Well first of all Jim, just let me say, there are still many significant positives about this business.
The fundamentals of the business are still – are extremely solid. Its position as the market leader in this space has not changed.
The business has excellent scale. It’s got an outstanding customer base.
We built an outstanding leadership team. This is really the first time that this team has missed their numbers.
We really recognize that, the need that they need to establish credibility particularly in 2013. So we’re really focusing on 2013 as the year that we need to really make sure we’ll reestablish our credibility in the market place.
But the overall value proposition of this business has not changed. It has not changed significantly at all and we feel really confident about the future of the business.
So what I'll tell you is that we want to make sure that we get the earnings back on track, the organic growth back to double-digit that we’ve recognized and we see 2013 as kind of a proven year.
James von Riesemann - UBS Investment Bank, Research Division
Okay, super. Thanks.
I’ll jump back in the queue.
Operator
Our next question comes from Brian Russo. Please go ahead.
Brian Russo - Ladenburg Thalmann & Co.
Hi, good morning.
Mark T. Thies
Hi Brian.
Brian Russo - Ladenburg Thalmann & Co.
Just on the general rate case settlement. Historically you guys have guided towards roughly like 150 basis points of regulatory lag, and I know you provided a consolidated ROE outlook for ’13.
Should we imply with the settlement that, that lag at the utility is narrowing and by how much?
Mark T. Thies
I think we’ve – when we provided in the past we’ve given two different components to lag. The 70 to 90 basis points of lag is what we characterize as some structural lag, there’s certain cost, marketing dollars, Board of Directors costs and other costs that we adjust or either by statute or past practice not allowed that we expect to continue.
So if you look at that authorized in Washington of 9.8% and we have 80 basis points there, we’re at 9%. The remaining lag in the past we’ve talked about in the 60 to 80 basis point range.
So that would really – actually if it was on the 80 basis points that would put us below our overall expected range on a consolidated basis there. So we do believe we had made – we have made some progress, some good progress, but we still have to – we have the opportunity also to manage our business to make even more progress and that’s what we’re in the process of doing.
So we have made some incremental progress and we believe we have the opportunity to make more through 2014.
Brian Russo - Ladenburg Thalmann & Co.
Okay. And just to confirm, the $14 million of cost cuts that’s needed to get you to the midpoint of your consolidated ROE range in ’13?
Mark T. Thies
Yes. That’s included in our expectations.
Brian Russo - Ladenburg Thalmann & Co.
Okay. And can you remind us what load growth is embedded in your ’12 guidance and what load growth is embedded in your ’13 guidance?
Mark T. Thies
Again we’ve said in the past that it’s been about 0.7% to 1.5% and we’re at the low-end of that. We continue to expect the economy to be sluggish.
We’re not optimistic in our forecasting about the economy. So we do expect load growth – I mean I don’t want to be completely negative.
We do expect load growth and customer growth, but it’s just less than 1%.
Brian Russo - Ladenburg Thalmann & Co.
Okay. And then on Ecova, you mentioned delayed implementation roll throughs, and I’m just looking at your previous ’12 guidance with $0.16 to $0.19 and your new ’13 guidance is less than that.
So it seems to me that there’s something structurally here where these implementations aren’t being realized in ’13, or your costs are rising and your margins are contracting and I was just wondering maybe if you could discuss or touch on some of the assumptions on revenue growth or operating margin as a percent of revenue, something to give us a better level of comfort or at least something to track as we move through 2013?
Mark T. Thies
Well a lot of – when we did the acquisitions that we did in at the end of ’11 and early 2012 we were really – we were adding infrastructure and customers to allow us while not really having a significant impact on our earnings, we said that we expect it to be neutral for ’12. But those acquisitions added a fixed cost infrastructure that we will be able to grow off of and improve our earnings.
In addition, there are some amortizations of those acquisitions that are short in nature of intangible assets and those provide a drag on our earnings and we didn’t recognize or we didn’t see the growth in revenues over that fixed base. That will continue into ’13, but we still believe we have a strong base to continue to grow our earnings.
So that cost infrastructure in place will allow us to continue to grow our earnings and we might not get back to that ’11 number for some time, but we do expect to have good infrastructure, good growth in that company and that’s all included in our – so yes our margins because of that, adding those costs it’s really the fixed cost infrastructure have come down.
Brian Russo - Ladenburg Thalmann & Co.
Okay. So no outlining any assumptions embedded in your ’13 guidance other than double-digit growth?
Mark T. Thies
Right.
Brian Russo - Ladenburg Thalmann & Co.
Okay. And just on corporate; what’s left in the other segment in terms of any remaining investments, just so we do potentially prepare ourselves for any future write downs if there is anything left?
Mark T. Thies
That’s always bothersome to us when we have impairments and it just seems like we always have them and they’re small. We have about $22 million in investments left, some – about $7 million is in real estate which is leased up.
$6.5 million are in remaining in these venture funds and about $9 million is in METAL fx, the metal manufacturing business. That business continues to be profitable and its generating income and cash and repaying its debt.
So we feel that’s very strong. So while there is some, balance about $12 million, $13 million we just continue to manage those properties and exit.
When we find an opportunity to exit, we will; but we’re trying not to take a bath, although it seems like we continue to get beat-up on it, so I can understand the frustration.
Brian Russo - Ladenburg Thalmann & Co.
So just on real estate, is that book value or is that an assessment of market value – I mean I’m just trying to get a sense, because these seem like pretty large numbers of investment?
Mark T. Thies
It’s book value. But we have to do an impairment calculation or have an assessment of market value and it’s really that assessment is, they’re leased up, so it’s the recovery of the rental revenues on a discounted cash flow basis supports the balance that we have on our books.
Brian Russo - Ladenburg Thalmann & Co.
Okay. Thank you very much.
Mark T. Thies
Thanks, Brian.
Operator
Our next question comes from Michael Worms. Please go ahead.
Michael Worms - BMO Capital Markets
Thank you.
Mark T. Thies
Good morning.
Michael Worms - BMO Capital Markets
Mark with regard to Ecova, what was the expected growth rate prior to the main announcement?
Mark T. Thies
All right. Well we had historically had 13% and we expected that to continue.
Michael Worms - BMO Capital Markets
Okay. And so it seems to me that the growth rate has slowed considerably in 2012, and so I am still looking for something to hang my head on that gives me confidence that you guys can grow at 11% in 2013.
Because if you’re going to growth at 10% or 11% that’s not too far off the early guidance of 2012 and you missed it badly. So where is the growth coming from that did not materialize this year?
Mark T. Thies
Well there is a combination. First we raised our base and we had a lot of growth, a lot of significant growth in the utility business.
And we would add multiples of the 13% in that utility business and that slowed significantly. That was the driver of about half of our growth.
45% of our expected revenue increases came out of just that utility business. Now that was a combination of some as Scott mentioned, some utility programs canceling, and also just we had expectations in the third and fourth quarter – primarily fourth quarter of higher growth that we didn’t materialize.
A smaller amount, so that the energy services business represented about 60% of that, and that we continue to see strong bookings and a strong pipeline of revenues. So we do expect to get those revenues booked and we are focused on that, and I think we’ll get it.
Again, we’re going to have to prove it. We recognize that, because we did miss badly.
Again the miss badly on these numbers is in relative millions it’s significant to Ecova. But on an overall revenue basis we believe we can get that and demonstrate that revenue growth.
The other side on the expense in the treasury, we just had some slowing growth there, and we continue to look forward and see that there’s opportunities as we continue to add customers. We’re still seeing the growth and the runway, so our sales staff continues to be optimistic that we can achieve that.
Michael Worms - BMO Capital Markets
Okay.
Scott L. Morris
Mike, I would just add that on facility optimization, real time building management we had projected some continued excellent growth in that area. It’s a newer product of ours that we have not seen the market adoption that we would expect it in 2012, but we do continue to see significant upside on that market optimization piece for 2013.
And the other piece that we really felt that we were going to be able to grow the business on was part of the acquisition from LPB which was a real estate owned kind of market. There’s still a significant amount of homes being repossessed and there is banks and Fannie and Freddie looking for ways to help them with those costs.
That implementation came later in 2012 than we expected. But it’s in place and we expect to see that grow in 2013.
Those – both facility optimization and REO are new product and business lines for us.
Michael Worms - BMO Capital Markets
Okay. So what I’m hearing here is that you still have a significant amount of confidence in Ecova growing going forward.
Scott L. Morris
Yes.
Michael Worms - BMO Capital Markets
And if that’s the case, then why was it necessary earlier in the call to mention that you would consider strategic options for Ecova including sale at some point?
Scott L. Morris
Yes Mike, I think one of the things that we realized and are recognizing is that long-term this is still a – but we’re a utility business and that while we really enjoy the growth. We enjoy the Ecova.
We know long-term that perhaps that for Ecova to really continue to grow and the best way to maximize shareholder value is perhaps to have other options than to have it just stay embedded and its part of our Company.
Michael Worms - BMO Capital Markets
Because I don’t think you get a whole lot of credit for Ecova in your stock price and when something blows up like this you pay the penalty.
Scott L. Morris
We do.
Michael Worms - BMO Capital Markets
Okay. Second question would be, with regard to the voluntary severance program.
How does that impact the settlement you just announced in Washington?
Kelly Norwood
This is Kelly Norwood. As we put the settlement together and we actually filed the settlement last week and along with that we filed sponsoring testimony.
And in that testimony we made it clear that the only way the settlement works for us is if we do manage our cost going forward. And in fact through the discussions which were all confidential, but the bottom line is if there’s an expectation that we as a company do manage our costs going forward.
And so the settlement actually does provide a good foundation for us going forward for ’13 and ’14, but it’s with the understanding by both the regulators and us that we need to manage our costs and that voluntary settlement is part of that.
Michael Worms - BMO Capital Markets
Thank you very much.
Operator
Our next question comes from Michael Bates. Please go ahead.
Michael Bates - D.A. Davidson & Co.
Hey, I just wanted to follow-up on Michael’s last question. We’ve been talking about this expectation that utility operating cost would be up significantly in 2013, and with these cuts you’ll be able to manage them back to the 3% or 4% growth.
Can you give us a little bit more color about what exactly was coming up next year that would be so much larger than what we’ve seen in the past?
Mark T. Thies
Well, there’s a number of things that have continued; now some of its not just the – there’s some revenue reductions that we experienced prior to filing when we filed the rate case to when we got to this summer and we announced this really in August, we said look our economy has slowed. Well that slowing in the economy has also negatively impacted our results.
So to again manage our business when things slow down you have to look at your cost and so that’s part of it. And then in addition, interest rates have continued to decline and that impacts the discount rate for our pension and post retirement benefits and those numbers increase.
We always start with just a general increase and then we also layer on major maintenance and different operating projects that we can look at, and so we have to look at our entire business and look at all of our different requests. When we add all that up and throw it all in preliminarily it’s higher and it’s up to $14 million.
In the past we’re probably around $7 million or $8 million impact in the past budget. So this isn’t unusual, when we first start and then we have to go back and we have to look at everything and manage our business the way we do.
So from that perspective this is a little bit larger number than in the past, but we believe it is completely manageable as we go forward.
Scott L. Morris
And Mike I would just add, remember that Washington has a 11 month process to execute on a rate case. So it’s not unusual off for every year that we filed a rate case there’s a 11 months of change that’s embedded in just from the time we filed to the time we implement.
So, costs go up and down in that timeframe and every year we’ve had to do this. This is not unusual as Mark said, it’s a little bit greater primarily because of the discount rate and the revenue hit, but it’s not anything that we haven’t done before and we’re very confident that it’s something that we will just manage through.
Michael Bates - D.A. Davidson & Co.
Thank you.
Operator
We have no further questions at this time. I will turn the call back over to Jason.
Jason Lang
Thanks, Eric. We appreciate your time this morning and thank you for your interest in our Company.
Have a great day.
Operator
Thank you ladies and gentlemen. This concludes today’s conference.
Thank you for participating. You may now disconnect.