Nov 5, 2014
Executives
Jason Lang – IR Scott Morris – Chairman, President and CEO Mark Thies – SVP and CFO Dennis Vermillion – SVP; President, Avista Utilities Kelly Norwood – VP; VP, State and Federal Regulations, Avista Utilities
Analysts
Paul Ridzon – KeyBanc Capital Markets Michael Weinstein – UBS Securities LLC Michael Worms – BMO Capital Markets Jim von Riesemann – CRT Capital Group
Operator
Welcome to the Q3 2014 Avista Corporation Earnings Conference Call. My name is Adrian, and 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.
Jason Lang, you may begin.
Jason Lang
Thanks, Adrian. Good morning, everyone.
Welcome to Avista’s third quarter 2014 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; Senior Vice President and the President of Avista Utilities, Dennis Vermillion; 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 2013 and our Form 10-Q for the second quarter of 2014, 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 earnings from continuing operations for the third quarter of 2014 were $.16 per diluted share, compared to $0.14 for the third quarter of 2013. Our consolidated earnings for the third quarter of 2014 were $0.16 per diluted share, compared to $0.19 for the third quarter of 2013.
On a year-to-date basis, earnings from continuing operations were $1.45 per diluted share for 2014, compared to a $1.23 last year. Our consolidated earnings for the year-to-date were $2.59 per diluted share for 2014, compared to $1.32 last year.
Now, I will turn the discussion over to Scott.
Scott Morris
Well, thank you, Jason, and good morning, everyone. We continue to experience a strong 2014 in terms of achieving the milestones we’ve set for earnings growth and positioning our company.
The recent completion of the sale of Ecova and the acquisition of our Alaska Electric Light and Power Company continue to provide the opportunities for earnings growth going forward, including exploring new market opportunities in Southeast Alaska. We’re excited to have AEL&P as part of our company and we look forward to becoming an integral part of the Juneau community.
With respect to regulatory matters, in August we reached an all-party settlement agreement in our Washington general rate case filed in February 2014, new rates will take effect on January 1, 2015. The settlement is designed to increase annual electric based revenues by $7 million and annual natural gas based revenues by $8.5 million.
We expect the Washington commission to issue an order regarding the settlement before the end of 2014. In September, the Idaho commission approved a settlement agreement with all interested parties for a one year extension to our current rate plan, which was set to expire at the end of 2014.
Under the extension base retail rates remained unchanged through the end of 2015. In September, we filed a natural gas general rate case in Oregon, requesting an overall increase in base natural gas rates of $9.1 million.
The Oregon commission has up to 10 months to review the case and make a decision, if approved new rates will take effect no later than July 2015. AEL&P is continuing to evaluate the need to file an electric general rate case and we don’t expect the filing in 2014.
Based on our strong 2014 thus far and our expectations for the fourth quarter we are confirming our 2014 earnings guidance, with a consolidated range of $3 to $3.20 per diluted share. We expect to be in the upper half of this range, including the impacts of ERM.
We’re also initiating our 2015 earnings guidance, with a consolidated range of $1.86 to $2.06 an increase of 4.8% over our original 2014 earnings guidance at the mid-point and Mark is going to provide detail on our earnings guidance here in a few minutes. And I am going to turn it over to Mark.
Mark Thies
Thank you, Scott. Good morning, everyone.
Our utility earnings were $0.16 per diluted share for the third quarter of 2014, compared to $0.16 in the third quarter of last year and on a year-to-date basis Avista Utilities contributed $1.38 per diluted share, an increase from $1.27 last year. For the third quarter of 2014, we recognized a pre-tax benefit of $0.4 million under the Energy Recovery Mechanism in Washington, compared to an expenses of $4.7 million in the third quarter of last year recall last year in the third quarter we have one of our units at Colstrip down for the entire quarter.
For the nine months ended September, we recognized a pre-tax benefit ERM of $5.3 million compared to a pre-tax expenses of $0.5 million last year. For the full year of 2014, we do expect to be in a benefit position within the 75% customer and 25% company sharing band.
We continue to be committed to updating and maintaining our utility system. In the first nine months, we spent $229 million on Avista Utilities’ capital expenditures.
We expect capital expenditures to be about $355 million in 2014 and similar in ‘15 and ‘16. We expect approximately $3 million in the second-half of the year and $15 million for 2015 and 2016 in related capital expenditures for AEL&P.
I am now going to discuss kind of our liquidity and financing plans. We have a $400 million committed line of credit with various financial institutions at Avista Utilities and in April we amended this agreement to extend the expiration to April of 2019 so, there is additional two years from its previous date.
And as of September 30th of 2014, there were $35 million of cash borrowings and $45.6 million of letters of credit outstanding leaving $319 million of available liquidity under that line. AEL&P has a committed line of credit in the amount of $14.5 million with an expiration of June of 2015.
As of September 30th there were no borrowings outstanding under that facility. In September of 2014, AEL&P issued $75 million of 4.54% first mortgage bonds, the proceeds of which were used to repay approximately $38 million of existing AEL&P debt and the remainder of the proceeds together with some cash on hand were paid as a cash dividend of $50 million to Avista Corp.
associated with rebalancing the consolidated capital structure at AERC. In addition to the first mortgage bonds, we expect to issue $15 million in term loans at AERC during the fourth quarter of 2014.
In October, we entered into a bond purchase agreement with three institutional investors and a private placement market to issue $60 million of Avista Corp. first mortgage bonds that are expected to be issued in December of 2014.
The first mortgage bonds will bear an interest rate of 4.11% and will mature in December of 2044. In the first nine months of 2014, we issued $153.5 million of common stock, $150.1 million associated with the acquisition of AERC, and the remainder under dividend reinvestment and direct stock purchase and employee plans.
We don’t expect to issue any additional shares for 2014 other than those under the dividend reinvestment and direct stock purchase and employee plans. On July 7th of this year we commenced the stock repurchase program to repurchase up to 4 million shares of our outstanding common stock, the program will expire on December 31st of 2014 and we have the option to terminate the program before that date.
Through October 31st, we have repurchased 2.5 million shares at a total cost of approximately $80 million and an average cost of $31.57 per share. For 2015, we expect to issue approximately $100 million of long-term debt and approximately $30 million of common stock to maintain an appropriate capital structure.
I will now talk about guidance as Scott mentioned earlier, we are confirming our 2014 earnings guidance of $3 to $3.20 per diluted share and we expect to be in the upper half of the this range including the impacts of the ERM. Our updated guidance includes the dilutive impact from issuing of 4.5 million shares of common stock on July 1, for the acquisition the Alaska last acquisition as well as our current expectation to repurchase the 4 million shares of common stock through our repurchase program by December 31st of this year.
We expect Avista Utilities to contribute in the range of $1.79 to $1.94 per diluted share for 2014. During the second quarter of this year we increased our guidance from initial guidance range of $1.68 to $1.82 per diluted share at the utility.
We expect to be in the upper half of this range, including the impacts of the ERM. In 2014, as I mentioned earlier we expect to be in a benefit position under the ERM within the 75% customer 25% company sharing band, and our range for Avista Utilities encompasses the expected the variability and power supply cost and the application of the ERM to that power supply cost variability.
Our outlook for Avista Utilities assumes among other variables normal precipitation, temperatures and hydro-electric generation for the reminder of the year. We expect AERC to contribute in the range of $0.03 to $0.04 per diluted share for the second half of 2014.
Historically their earnings have been approximately two-thirds in the first half of the year and one-third during the second half of the year. Our outlook for AEL&P assumes among other variables again normal precipitation, temperatures and hydro-electric generation for the reminder of the year.
We expect Ecova to contribute in the range of $1.13 to $1.15 per diluted share for their six months of earnings and a net gain on the sale, which is consistent with what we’ve reported in the past. And we expect other businesses to contribute between $0.05 and $0.07 per diluted share.
With this press release, we’re also initiating 2015 guidance for consolidated earnings to be in a range of $1.86 to $2.06 per diluted share. We expect Avista Utilities to contribute in the range of $1.81 to $1.95 per diluted share for 2015, and as compared to 2014 we expect our Avista Utility earnings to be positively impacted by general rate increases, yet they will continue to be limited by slow load growth and growth in operating expenses.
Our range for Avista Utilities encompasses expected variability and power supply cost and the application of the ERM to that variability and the midpoint of our guidance range for Avista Utilities does not include any benefit or expense related to ERM. Our outlook for Avista Utilities assumes among other variables normal precipitation, temperatures and hydro-electric generation.
It’s also important to note that our guidance assumes the implementation of our settlement in the Washington general rate case on January 1, 2015, which is still subject to approval by the Washington Utilities and Transportation Commission. For 2015, we expect AEL&P to contribute in the range of $0.08 to $0.12 per diluted share, and our outlook for AEL&P includes among other variables normal precipitation, temperatures and hydro-electric generation.
Finally we expect our other businesses to be between a loss of the $0.01 and a loss of $0.03 per diluted share, which includes cost associated with exploring for strategic opportunities. Overall our guidance generally includes only normal operating conditions and does not include unusual items such as settlement transactions, impairments, acquisitions or dispositions until the effects are known and certain.
With that I’ll now turn the call back over to Jason.
Jason Lang
Thanks, Mark. Adrian we’d like to open the call for questions, now please.
Operator
Thank you. We will now begin the question-and-answer session.
(Operator Instructions) And we have Paul Ridzon from KeyBanc online for the question. Please go ahead.
Paul Ridzon – KeyBanc Capital Markets
Good morning.
Scott Morris
Hi, Paul.
Paul Ridzon – KeyBanc Capital Markets
As you continue to look at kind of strategic initiative kind of leaning up towards anything else, [talk to us on]?
Scott Morris
Well, we continue to look at our opportunities in L&G, we’re looking in Alaska for opportunities to possibly bring gas there, they are largely a diesel based service area. And so we can replace diesel with natural gas, that’s an opportunity to look at and we continue to pursue that we’re also pursuing that Around Hawaii or transportation, marine fueling.
So we continue to look at that we’ll update you when we have significant events to do that. At this point we are spending a lot of time looking at, but we don’t have a particular event to say here is what we’re doing specifically.
And we will do that when we have that type of opportunity.
Paul Ridzon – KeyBanc Capital Markets
Got it. And then just looking past ‘15 what are you thinking about as far as financing needs.
Scott Morris
We haven’t come out with guidance for beyond ‘15, but again we’ll continue we do expect with our capital the 5% to 6% rate base growth and spending $350 million on capital we will have some financing needs and we’ll continue to finance our balance sheet in a prudent manner, which would include some debt and some equity as we continue to – we’ll use some of our earnings as growth and use that to support some of our CapEx and we will have some financing needs. But given that we haven’t really provided any forward guidance beyond ‘15, I don’t have any specifics.
Paul Ridzon – KeyBanc Capital Markets
And just given kind of a flat CapEx in ‘16 kind of maybe similar to ‘15.
Scott Morris
You could make that assumption, but I don’t have all the details of the moving parts. Historically, Paul historically we’ve been between $25 million and $50 million in equity.
And this year we did $60 million, so maybe $60 million and $125 million in debt those are broad ranges, but I think we’d be in those ranges.
Paul Ridzon – KeyBanc Capital Markets
Okay, thank you very much. Fair enough.
Scott Morris
Thanks, Paul.
Operator
And our next question comes from Michael Weinstein from UBS. Please go ahead.
Michael Weinstein – UBS Securities LLC
Hi guys. How are you doing?
Scott Morris
Hey, Mike.
Michael Weinstein – UBS Securities LLC
Just curious actually first question. The last page in your presentation where you have the question slide, it looks like you are awfully troubled while going onto that bridge, is that supposed to mean something?
Scott Morris
No.
Michael Weinstein – UBS Securities LLC
So anyway but big rocks in the way too.
Scott Morris
I show you facility of that, that’s exciting for us, that’s good stuff.
Michael Weinstein – UBS Securities LLC
Hey. I was wondering if you guys have any insight into what cold strip might need in terms of SCRs going forward.
My understanding is that all four units over there are no SCRs or anything? And it’s kind of an off wall question.
Dennis Vermillion
This is Dennis. We’re currently evaluating the need of SCRs for units three and four of a timing of it essentially.
Recall that we are 15% owners of units three and four we have no ownership interest in units one and two. So we’re continuing to look at that 2020s timeframe, somewhere in there is likely to be when that might be required.
Michael Weinstein – UBS Securities LLC
Okay. And has there been any impact on the buyback from the higher stock prices that you guys have experienced over the last couple of weeks?
Scott Morris
Well in the last couple of weeks yes, so we gave you that through October we had $2.5 million, our guidance assumes that we’ll get there. If we don’t get there because if we didn’t buyback due to the high, the run up in price, it will be slightly over [equatized] going into next year and as we reported in this next year’s guidance we expect $30 million in equity next year.
So even if we don’t get it done this year I think it only be a couple of cents dilution to next year. So I don’t think it’s a really a big deal if we get done it out, but we haven’t been buying at these recent prices.
Our average price was $31.57 I believe. I know we disclosed but I just don’t have right in front of me.
So I think at these prices we’re probably not in the market to buy, but I don’t think it’s a big impact.
Michael Weinstein – UBS Securities LLC
And my last question just about the Alaska rate case filing, I am not sure if you said this I might have missed it, could you just talk about what do you plan to file for and what the strategy there going forward?
Kelly Norwood
Yes, this is Kelly. We worked with AEL&P to see what’s there and generally speaking the rate base has been relatively flat in the last year or two of course there is plans going forward for additional investment there.
But because of that they’re managing their expenses. Right now there is not an immediate need to file a case, but we’ll look at that in early ‘15
Michael Weinstein – UBS Securities LLC
Thank you very much.
Kelly Norwood
Thanks Mike.
Operator
And our next question comes from Michael Worms from BMO Capital Markets. Please go ahead.
Michael Worms – BMO Capital Markets
Thank you. Good morning, everyone.
Scott Morris
Hi, Mike.
Michael Worms – BMO Capital Markets
Hey, how are you doing? Can you just talk a little bit about the other in 2014 it looks like it will add about $0.05 to $0.07 a share and then you lose it in 2015, can you just tell us what the moving parts are there?
And just as a comparative basis what other contributors in 2013?
Scott Morris
Well I think I don’t recall what other contributors in 2013; in 2014 the big difference is we got the settlement from Avista Energy, which was about $15 million. And so that resulted in earnings, that’s pre-tax and then we made $6.5 million donation to the Avista Foundation, so that’s an expense.
On a net basis that really drove 2014’s number to be what it was. And then with respect to 2013 that’s largely just again continuing to have some cost to analyze strategic opportunities we’ve said we expect to spend around $3 million to continue to analyze opportunities in LNG and then opportunities in South East Alaska.
So we will continue to spend those, and so that’s what in those cost we have some small other businesses in there that really have some moving parts, but it really not significant METALfx makes about $1 million a year. So I think from a ‘14 to ‘15 that’s what that is Mike, I don’t recall what happened in ‘13.
Michael Worms – BMO Capital Markets
Okay, I can look that up. Thanks a lot, see you next week.
Scott Morris
Bye, thanks Mike.
Operator
(Operator Instructions). And we have Jim von Riesemann with Earth Capital online with the question.
Please go ahead.
Jim von Riesemann – CRT Capital Group
Hey guys, how are you this morning?
Scott Morris
Good Jim, how are you?
Jim von Riesemann – CRT Capital Group
Hey, I actually have a couple of questions I know there is some legislative activity going on both in Oregon and the State of Washington with respect to climate change I guess in Oregon it’s just 306 Senate Bill and supposed to be some disclosures made by, you guess mid-month on the 15th, can you talk a little bit about that? And then talk about Governor Inslee’s climate – who is basically the limited coal by wire in the state and what sort of progress she might be making there on either reaching a settlement or coming to a good outcome?
Scott Morris
Jim in Oregon because we are gas only utility we really haven’t been following 306 particularly close, we don’t feel from a business perspective we observe it. But so I can’t really comment on the details of 306, but in Governor Inslee’s agenda I would say that Governor as you know is very passionate on climate change.
The results of the Senate races in Washington state last night means that the state Senate will stay Republican. So my sense would be it would be difficult for the Governor to execute around all of the strategies around climate change as he is seeing or as explain.
So we will continue to work with the Governor to see what we can do to work collaboratively with him, but I would suspect that it will be slower go for the Governor with his plans. And as we like to remind the Governor we’re one of the greenish utilities not just in Washington state, but in the country we have one of the lowest carbon footprints of any utilities.
So no matter what the Governor really implements, we feel like we are well positioned already.
Jim von Riesemann – CRT Capital Group
Okay. Do you have any idea when we make out some sort of closure on this topic?
Rather than just going naturally just naturally die out maybe?
Scott Morris
No, what I would just say if Governor Inslee has said it’s one of the key plans of his administration. So my sense is that he is going to stay very focused on it.
So whatever he chooses to do in 2015, I would expect that it will continue in 2016 and into his reelection campaigns. So I don’t expect it to go away.
Jim von Riesemann – CRT Capital Group
Okay, thank you.
Scott Morris
Thanks, Jim.
Operator
And we don’t have any further questions at this time.
Jason Lang
I would like to thank everyone for joining us today. We certainly appreciate your interest in our company.
We look forward to seeing all of you at EEI. Have a great day.
Operator
Thank you, ladies and gentlemen. This concludes today’s conference.
Thank you for participating. And you may disconnect.