Lauren Pendergraft - IR Scott Morris - CEO Mark Thies - CFO Kelly Norwood - VP, State & Federal Regulation

Chris Ellinghaus - Williams Capital Research Brian Russo - Ladenburg Thalmann

Thank you, Richard. Good morning, everyone and welcome to Avista's third quarter 2016 earnings conference call.

After having to listen to Jason for the last 10 years, I hope you are as excited as I'm for my first earnings call. I look forward to working with all of you in the upcoming year.

Our earnings and our third quarter 10-Q were released pre-market this morning, and they are both available on our website at avistacorp.com. Joining me this morning is our CEO, Scott Morris; CFO, Mark Thies; and the Vice President of State and Federal Regulation, Kelly Norwood.

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 10-K for 2015 and our 10-Q for the third quarter of 2016 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 consolidated earnings for the third quarter of 2016 were $0.19 per diluted share compared to $0.21 for the third quarter of 2015.

For the year-to-date, consolidated earnings were $1.53 per diluted share for 2016 compared to $1.35 last year. Now, I'll turn the discussion over to Scott.

Well, thank you Lauren and good morning everyone. I am pleased with our third quarter performance as our results meet our expectation.

Throughout 2016 we've continued to invest in our utility infrastructure to enhance the safety and reliability of our system for our customers and to support both, electric and natural gas growth. Current investments include upgrades and maintenance of generation facilities, transmission and distribution equipment, natural gas pipe and new meter technology, some of which are large multi-year projects that have been in progress.

The timely recovery of these costs continues to be essential to earning in adequate return on our investors and shareholders return. In October, we reached a settlement agreement with all parties in our -- on our Idaho electric general rate case that if approved will result in new rates beginning January 1, 2017.

I'm pleased with the settlement in Idaho which gives us the opportunity to continue to provide the safe reliable energy our customers expect by earning a fair return for shareholders. We continue to work through the general rate case process in Washington and we anticipate filing a general rate case in Oregon during the fourth quarter.

In Juneau, AEL&P continued its steady performance during the quarter and is expected to meet its earnings target for the year. In September AEL&P filed an electric general rate case seeking an interim rate increase which if approved can take effect as early as November 23, 2016.

A permanent rate increase if approved could take effect in December of 2017. AEL&P's last rate increase was in May of 2010.

During the third quarter we committed to make investments of up to $25 million over a five year period in a private equity fund of strategic utility partners. The fund will invest in emerging technologies and products and services throughout the electric supply chain that will benefit utilities and their customers.

Turning to our activities in Alaska, as you know, last year our Salix subsidiary was named as the preferred respondent to an RFP to provide LNG to the interior energy project in Fairbanks. Recently an agreement was entered into between Salix and the Alaskan industrial development and export authority which concludes Salix's involvement in the project.

We anticipate the opportunity to work on the interior energy project and look forward to exploring other LNG opportunities in North America. With regards to the possibility of bringing natural gas to Juneau with lower oil prices, our two key issues have been identifying a cost effective way to help with customer converging cost and securing low cost project financing.

We made good progress on both fronts in our discussions with certain agencies to identify programs that might apply to this project. If we can get comfortable with these two issues, we intend to file an application with the regulatory commission of Alaska for authority to build and operate the gas utility in Juneau, and we'll keep you posted on the progress we're making each quarter, and we'll let you know how it's going in the future.

And with that I'm going to turn it over to Mark.

Thank you, Scott. Good morning, everyone.

I just want to always start off -- I try to start-off a little bit sports analogy so being a lifelong White Sox fan this is going to be a little tough for me but go Cubbies tonight, I hope they do it in Cleveland. For the third quarter Avista Utilities contributed $0.20 per deluded share in both 2016 and 2015.

On a year-to-date basis, Avista Utilities contributed $1.49 per deluded share, an increase from $1.30 last year. The increase in earning for the year was due to general rate increases, decoupling and customer growth, partially offset by expected increases in operating expenses and depreciation.

We continue to be committed to updating and maintaining our utilities systems just as Scott mentioned, we expect Avista Utilities to spend about $375 million in 2016, and we expect AEL&P's capital expenditures to be about $17 million in 2016. I'll turn on -- move along to liquidity and financing plans; as of September 30 we had $140 million of available liquidity under Avista's committed line of credit, and there were no borrowing or letters of credit outstanding under AEL&P's line of credit.

For the first nine months of 2016 we issued 1.6 million shares of common stock for net proceeds of $66 million under our sales agencies agreements. We have 2.2 million shares remaining to be issued under these agreements.

We also issued 0.3 million shares of common stock for net process about $1 million under our employee plans. For the rest of the year we don't anticipate issuing any additional common stock other than under our employee plans.

In August of 2016 we entered into a term loan agreement in the amount of $70 million with a maturity of December 30, 2016. We borrowed the entire amount which was used to repay a portion of the $90 million in first moorage bonds that matured in August.

Also in August we entered into a bond purchase agreement in the private placement market for the issuance and sale of $175 million of Avista Corp. first mortgage bonds in December of 2016.

The first mortgage bonds will bear a coupon of 3.54% and mature in December of 2051. The proceeds of the bonds received in December were used to pay-off the $70 million term loan, and pay down the outstanding balance of our committed line of credit.

In connection with the bond purchase agreement, we settled interest rate swaps and paid a total of $54 million which we expect to amortize over the life of the project. Moving on to our guidance, Avista is confirming its 2016 guidance to be in the range of $1.96 to $2.16 per share.

We expect Avista Utilities to contribute in the range of $1.91 to $2.05 per diluted share for 2016. Our range for Avista Utilities and campuses expected variability and power supply cost and application of the Washington to that power supply cost variability.

The midpoint of our guidance range for Avista Utilities as soon as no benefit or expense under the euro. We expect the benefit to be in the benefit position within the $4 million debt band resulting in about $0.02 to $0.03 of earnings per diluted share for 2016.

Our outlook for Avista Utilities assumes among other variables normal precipitation and temperatures for the remainder of the year, and our guidance range encompasses a return on equity for Avista Utilities of 8.6% to 9.2% from the top to bottom. For 2016 we expect AEL&P to contribute in the range of $0.09 to $0.13 per diluted share and our outlook for AEL&P assumes among other variables, normal participation and temperatures for the rest of the year.

We expect our other businesses to be between a loss of $0.02 to $0.04 per diluted share which included costs associated with exploring strategic opportunities. Our guidance generally includes only normal operating conditions and does not include items -- unusual items such as settlement transactions, impairments or acquisitions or dispositions until the effects are known and certain.

With respect to our 2017 earnings guidance, we expect to complete the process in our Washington general rate case by January of 2017 and will provide our 2017 earnings guidance in our February 2017 earnings calls. I'll now turn the call back over to Loren.

Richard, we would like to now open the call for questions.

You guys identified some start-up cost on this private equity. Can you attach a number to that?

Well, that was really the $0.02 in the other -- that we had $0.02 of negative of loss that was really -- almost all of that was the impact of the cost of getting into that fund.

Okay, great. And when does that capital sort of get deployed and is there a targeted return on that fund?

Yes, we expect to have venture capital returns on that fund and that capital will be deployed -- it's already had -- it's already started with its first investments. We expect them to draw over five years, it is a five year draw, and as they make it -- as the fund makes investments, we'll draw -- they are looking at various investments as we speak and they've already made a couple.

So we're part of that.

Okay. Can you give us any more color on Alaska, either Salix or the gas potential?

In regards to LNG and Juneau, Chris I would just say that we continue to be pleased with the progress we're making, it's been a challenging project as you know because of the price of oil but our teams continue to be very creative and continue to look for opportunities, and why we don't have anything to announce -- I'm pleased with the progress, so we'll keep you posted but I would say that things are progressing positively. In regards to Salix, you try opportunities, this one didn't pan out but there might be others down the pipe, so while it's too bad it didn't work out in Fairbanks, we're hopeful that there will be other projects coming our way.

Did Salix not end up working out on the LNG because of the other participants didn't work out? How that sort of transpired?

It's really a number of variables and primarily, again, the decline in oil prices is the biggest impact and we just reached an agreement with ADA [ph] who is running that project that we will be out of the project.

Is that possible to come back as conditions change?

I think anything is possible, I don't -- we're not planning on at this point, we're looking for -- as Scott mentioned, we're looking for other opportunities.

Okay. Lastly, are you working on a settlement in Washington at all?

This is Kelly. The process is essentially complete in Washington other than briefs are due November 7, which is next week.

After that it's really in the commission's lap to make the decision. They have until January 21 to set new rates if they chose to take that long.

We've asked for a rate change effective January 1.

Okay, great. Thanks for the color guys.

Thanks, Chris.

Hi, good morning. The $4 million positive benefit you expect in 2016, how does that compare to the year-to-date?

I'm just trying to get a sense if we should see something positive in the fourth quarter?

Well, again, it's not -- we are in the $4 million band. So that zero to $4 million band and what I said Brian was, we expect $0.02 to $0.03; and so we might see a $0.01 in the fourth quarter compared to where we are in the ARM right now.

I don't -- while we're 2.7 so if it goes anywhere it will be $0.01 either way.

Got it, that's helpful. And any idea about the potential size of investment for gas utility in Juneau?

Again, before previously we said the total project -- it was $130 million over 10 years, that's if we build up the whole thing. So what we're looking at now is that -- as Scott mentioned, does that make sense with customer.

So we think it would be -- that would be the size of the total project, we may start with something smaller if it makes some sense, but we're evaluating all of our options there and it really comes down to -- can we get -- like Scott mentioned, can we get the customer conversion cost, and can we get the lower cost financing? And we're working with agencies to do that, if we figure that out we'll file the paper or the proceedings with RCA, the commission in Alaska.

Okay, understood. And then I just wanted to learn a little bit about more about the private equity five year investment.

The corporate drag that you incurred in the third quarter, that's non-recurring, it was just kind of a start-up cost for you to invest in that fund is that way to look at it?

There are management -- annual management fees associated with that fund. So some of it is annual management, so we'll see some but we also expect to see some results as they make investments and those investments turn into earnings.

So again, that's all part of -- we've always said we expect to have up to $3 million or $0.03 in other things -- looking at strategic opportunities. This is going to be one of those things that's in that place, in that bucket.

So we'll be consistent with that, we've just identified it specifically to this fund.

And Brian, the utilities involved in the fund at this point are Southern National Grid, Excel, Amaron [ph], rate plans for this and us. So we feel we bring a good part of expertise to the fund because of our success with Acova I-Tron [ph], Avista Energy and some of our unregulated subsidiaries have done very well.

So we feel confident about our investment and we feel good about where we're at.

Yes, just on that point I know -- if you know, there was a time where you had quite a meaningful investment in these types of funds, and I'm -- and you laid out some larger market cap/utilities involved in this process, so that's in the front, so that's good but what makes this total investment different than historical investment -- some that worked out but others that didn't?

Well, for us -- I mean the big thing here is -- it's going to look at a lot of different investments that impact utilities customers, and it can try out those investments in the customer basis of the companies that are invested in it. So you'll have several million customers over the group's customer base and if there is a company that can work, we can use our customer basis to work through some of these different technologies and we think that will be successful.

For us, we like -- as Scott mentioned, the innovation is part of our DNA; so this provides us an opportunity to see all different kinds of technologies out there but not have to pick the fund, the exact company that we're going to invest all of our dollars and its spread over a number of companies, that's what -- that's the benefit of this fund and the people running it are experts in this and we believe that they have -- they bring strong expertise to it.

Yes, makes sense. Okay, thank you very much.

Thanks, Brian.

How did the fourth quarter start-off precipitation-wise for your basin or your river systems?

Chris, we are loving life if you like rain, we just set record for the most rain ever in the month of October, we've got over six inches which is significantly higher than anything that is normal for the month of October. So I'd say it's been just a good month, it was a great month from our preset perspective.

Okay, great.

So from an overall hydro-prospective, it will improve for October and November, it will still probably end the year slightly below normal but we are off to a great start like Scott said.

The longer term forecast still shows an elaninya [ph], which means colder than the weather normal polar and whether the normal, and while you never bank on that kind of stuff because again it's not precise but it's a good -- at least a good indicator and we feel good about, at least that's the forecast whether it develops or not, it's a whole another thing but its good news from that perspective.

At least it's a swing in the right direction, right?

Yes.

As far as the sort of start-up cost for the fund, was that anticipated during the year? I'm trying to think about -- you have this expectation of normally $3 million in drag for sort of some development efforts.

Is this incremental to that normal spend or was that already anticipated in your sort of budget for the year?

Well, so we're at $0.04 already, we'll probably end up at the high end of that range where we are but when we first did our budget last year did we have this investment in there? No.

I mean we've been looking at a lot of different things, we looked at it, we did team's evaluation, we thought it was a good opportunity for us to invest, so we made the investment. Within the overall expectation of guidance, it's included in our expectations of guidance as we look forward; so just on that component it stands out because its other, its $0.02 to $0.04, it's such a small range -- it's hard to say.

If that was in the utility, it would be noise and we wouldn't even hardly say anything because you would never it. So that -- it does stand out, was it anticipated -- not at the beginning of the year but throughout the year, yes; and we still expect to be in our guidance range and we expect to be positive in the year.

Okay. One more thing about -- decoupling in -- not Oregon, Idaho, that's just commercial and residential, right?

That is correct.

So is there -- was there any kind of material leakage in terms of decoupling mechanism in the quarter?

No, if you look at the results after the fact it's really accomplishing what we intended it to accomplish, so it's working actually very well.

Okay. Have you sort of analyzed the mechanism in Idaho to sort of determine what percentage of coverage you ended up getting in terms of decupling?

In terms of the customer classes?

Yes, given that it only covers the commercial and residential -- what is the slippage per say?

Right. Yes, we did the math on that before we designed the mechanism and proposed the mechanism.

I don't have the numbers but it really is capturing that variability that we were targeting, driven by whether its conservation or weather or the economy, but we found is for industrials that they are relatively stable in terms of usage and have been for some period of time and so it's really is capturing what we were after and if you look at the after the fact returns; in Idaho whether its electric or gas, we are actually doing very well there.

As far as your Idaho or service area, do you have much irrigation?

No, we have some but nothing compared to what Idaho Power has.

[Crosstalks]. Irrigation is in Washington, Chris.

Yes, I just wanted to see because it is a pretty substantial issue for Idaho Power. Okay, thanks a bunch.

Thanks, Chris.

Hi, correct me if I'm wrong but the total CapEx for '16 of $392 million, is that below a prior forecast of $432 million?

No, I don't know where you got that. We originally were at $375 million.

Okay, got it. I'll have to refresh that.

Thank you.

Okay, thanks.

I want to thank everyone for joining us today. We certainly appreciate your interest in our company.

Have a great day.