Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Avista Corporation Earnings Conference Call. My name is Keith, and I'll be your operator for today. [Operator Instructions] As a reminder, today's conference is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Mr. Jason Lang, Investor Relations Manager. Please go ahead, sir.

Thanks, Keith, and good morning, everyone. Welcome to Avista's Fourth Quarter and Fiscal Year 2011 Earnings Conference Call. Our earnings were released pre-market this morning, and the release is available on our website at avistaacorp.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 Regulations, 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 2010 and Form 10-Q for the third quarter of 2011, which are available on our website. To begin this presentation, I'd like to recap the financial results presented in today's press release. Our consolidated earnings were $1.72 per diluted share for 2011, compared to $1.65 for 2010. On a quarterly basis, our consolidated earnings were $0.42 per diluted share for the fourth quarter of 2011, compared to $0.45 for the fourth quarter of 2010. Now I'll turn the discussion over to Scott Morris.

Well, thank you, Jason, and good morning, everyone. Avista had a solid year in 2011 with our consolidated earnings per share in the upper half of our guidance range. The improvement reflects higher earnings at Avista Utilities and Ecova, our primary unregulated subsidiary, and a decrease in the net loss from our other businesses. Above normal snowpack last winter and a cool and wet spring produced excellent river run-off conditions in 2011. This resulted in one of the best hydroelectric generation years on record. The improvement in our 2011 utility results was primarily due to colder weather in the first quarter as well as general rate increases. As you recall, the first quarter of 2010 was one of the warmest January to March periods on record in our service territory. To maintain service reliability and meet the energy needs of our customers, we expect to continue to make significant capital investments in generation, transmission and distribution systems. Utility CapEx was $240 million for 2011, and we expect capital expenditures to be about $250 million in each of 2012 and 2013. The timely recovery of capital investments and operating costs remains one of our biggest challenges. We reached settlements in our Idaho and Washington general rate cases during 2011, which we believe provided a reasonable outcome for our customers and our shareholders. In Idaho, new rates went into effect on October 1st. As part of the settlement, we agreed not to seek a change in base electric or natural gas rates that would become effective prior to April 1, 2013, by means of a general rate case filing. Based on this agreement and knowing that rate cases in Idaho can take up to 7 months to complete, we're planning to file a general rate case in Idaho in the second half…

Thank you, Scott, and good morning, everyone. For 2011, utility earnings contributed $1.56 per diluted share, an increase of $0.01 from $1.55 last year, primarily as a result of increased gross margin. Net income from our utility operations increased $4.2 million in 2011 as compared to 2010 and the increase in earnings per share contribution was limited by dilution from common stock issuances. Our utility earnings for 2011 were positively impacted by an increase in gross margin primarily due to higher retail loads caused by colder weather during the first quarter and power supply costs below the amount included in base retail rates as well as general rate increases. The increase in gross margin was partially offset by an increase in other operating expenses, depreciation and amortization and taxes other than income tax. For the fourth quarter of 2011, our utility operations contributed $0.38 per diluted share compared to $0.45 in 2010. The decrease in the quarterly net income was primarily due to a decrease in gross margin as well as an increase in depreciation and amortization and taxes other than income tax. The decrease in gross margin was primarily due to the timing of the recognition of the Energy Recovery Mechanism in Washington, as we recognized most of the benefit under the ERM in the first 9 months of 2011. And in the fourth quarter of 2011, we recognized just $0.7 million under the Energy Recovery Mechanism. As part of the rate case settlement, in 2010, there were no deferrals under the ERM and allowable costs for the Lancaster plant were limited to $6.8 million. But during the fourth quarter of 2010, our power supply costs were $8.4 million below the level included in base retail rates in Washington. As a result of better-than-expected hydroelectric generation and purchased power…

Thanks, Mark. Keith, at this time, we'd like to open the call up for questions.

[Operator Instructions] Your first question is from the line of Paul Ridzon with KeyBanc.

Could we imply from your commentary about your 90/10 band that you would expect to be in the upper half of the utility earnings?

I think what we say is that we expect to be in the 90/10 and remember the sharing bands. The first one is $4 million, 100% company. The next band is the 75/25 is $6 million. So the company would get $1.5 million and the customers would get $4.5 million, and above that is the 90:10. So if you look at that, you can imply that we would make $5.5 million, and then you can calculate where that puts us in our range.

And you are going to $100 million of LTD, long-term debt, in '12. What's the use of that?

Well, it's again to fund -- we continue to have expectations of about $250 million of CapEx. And so if you look at it, we're going to have an appropriate balance sheet. We're invested in utility plants. So we aggregate that on our short-term facility for some time, but then we go out and issue long-term debt to term that debt out. And so this is just a normal course to help fund our CapEx.

Perfect. It clearly is new money. It's not going to be retiring other long-term debt?

No. The only long-term debt we have one small piece about $7 million that's retiring in 2012. So it's really money to fund our CapEx.

And then lastly, it looks like you changed your -- the way you recognize revenues at Ecova. Is that 13% revenue growth apples-to-apples?

That's why we said the 13% is the organic, because we were up -- the revenue growth was $35 plus million on a $100 million and I'm rounding a little bit there as $102 million. So you would have thought that the revenue growth was 35%, but we had a couple of things. We had the acquisition of Loyalton, we had 1 month for the acquisition of Prenova, we had the acquisition of Loyalton in the prior year. And then we had the accounting change that grossed up the revenues and the expenses, really not an impact to the bottom line. So we wanted to make sure that we were specific on the growth, the organic growth, which is still strong, double-digit organic growth we feel really positive about. And that's why we said the organic growth was 13% to show you the specific growth in the business year-over-year.

And the accounting change, was that $9.2 million?

Yes.

Your next question is from the line of Brian Russo with Ladenburg Thalmann.

Just to clarify on the guidance, if you're assuming you're going to be in the 90-10 ERM, that would imply kind of $0.06 to $0.07 of upside relative to the midpoint of your utility guidance. Is there a bias to the upper end of that guidance or are there operating cost pressures that are partially if not all mitigating the positive ERM as it stands today?

No. What we say is the midpoint of our guidance includes zero ERM. Right? So -- and we generally -- when we provide our guidance unless we tell you directionally where we're going to be, we generally look more towards the middle in our guidance. And the middle having zero ERM, you would then add the expectation of where we expect to be in the ERM. I don't think we're looking at it to offset other pressures. We would need to tell you what those other pressures are.

Right, okay, so I guess you're implying you're at the high end of your utility guidance, all else equal?

I don't say that. I just say here is what it is and then you add it on. But it's semantics.

Sure, understood. Just the recent Ecova acquisitions of $80 million in cash and the $20 million of equity infusion, does that change your -- Avista's net ownership of Ecova, or is that steady, I think, at 79.2% or something?

It's steady, Brian. No change.

Okay, and what type of sales growth should we assume this year?

Again, we don't -- for Ecova or for the utility?

For the utility.

Utility, again, as Scott mentioned, we expect it to be continued weak economy, and what we've said is we may grow about a 1% growth rate in customer. So we are still growing, but it's not significant. I mean, it's about 1% on both natural gas and electric.

Okay. And are you able to quantify what the fuel factor is embedded in rates that allows you to benefit under the ERM, primarily I guess in the fourth quarter or the second half of the year when you run your fossil fuel generation more?

This is Kelly Norwood. I don't have the specific numbers, but I can tell you that following the conclusion of the Washington rate case, natural gas prices continued to decline and that's a large part of what's driven us to the positive side of the ERM.

Okay. And what could we assume as an appropriate cap structure for you guys given the debt you're raising in '12 as well as the additional equity? Is 46% a good equity rate -- layer or should it be more like 48%?

As it goes over time in that range, it's probably accurate. I don't know -- I mean, it depends on the timing of when we raise our number, when we raise the equity throughout the year. So the average may be to the lower end, but the ending could be higher because we're raising it throughout the year. So it just depends on are you doing an average equity or probably in that range of 46% to 48%.

Okay. And then lastly, how would you characterize the current water supply levels or hydro expectations for this year?

Yes, this is Dennis. As of Monday, the Northwest River Forecast Center had both the Clark Fork and the Spokane rivers forecasted at about 91%. And that's a forecast of water supply for the April through September timeframe. So nothing like last year, but still reasonably okay.

[Operator Instructions] Your next question is from the line of Michael Klein with Sidoti.

Can you just clarify -- so you got a $6.4 million benefit off in the ERM and then there was $12.9 million deferred for future benefit. What exactly is that deferred amount?

It's Kelly Norwood. During 2011, we had a benefit under the ERM for shareholders. But anything beyond the $10 million, actually $4.5 million of the difference between $4 million and $10 million, 75% gets deferred for customers. And anything beyond $10 million, 90% gets deferred for customers. And we set aside roughly $12.5 million during 2011. So that's on our balance sheet, and at some point, that would be passed back to Washington customers.

Okay, understood. And I just want to make sure when we look at 2012 earnings at Ecova, the only additions from where we ended the year are going to be Prenova and LPB Energy. Is that correct?

Those were 2 acquisitions. We made Prenova in November and LPB in January of this year.

Right, right. So when we look at kind of what was included in earnings when we ended in the fourth quarter versus kind of what's to be expected on top of that in 2012, those are the 2 additions?

Yes. But we've said with both of those additions, we don't expect them to add to 2012 earnings just because of the initial cost of the transaction and the integration of those companies. But we do expect them to allow us to have continued growth beyond that in 2013 and beyond. We also expect to continue our organic growth at that business.

Right, understood. And can you just characterize -- in the guidance, flat to a loss of $0.02 in the other businesses, can you just characterize why that might be down for the year?

We've had -- I mean, some of those funds have had slight losses over the last several years. So we're just not going to come out with a -- we have to put a little bit of a range out there and we've got some certain corporate overhead, certain costs that don't run through our utility that get charged down there. So we always start off the year with a slight negative. But then METALfx continues to do a great job in growing their company and growing their earnings. So for me, a couple cents, it doesn't -- it's not a big deal. So we just have that range.

And you have one final question. It's from the line of Eric Beaumont with Copia Capital.

I appreciate you giving all the information. When you think you're going to be upper in the ERM, I know this feels like ask every year. But let's just make sure. With hydro being at 91%, that may not push through. Gas prices going down helped and obviously you have a presumption of having a little bit extra because you talk about lower customer demand. So you have a little bit extra for those sales. So kind of if we think through if things get stronger, you kind of have that natural buoy there. So as long as hydro doesn't really worsen significantly or gas prices don't really spike, you kind of have that natural balancing in there. Is that fair?

No, not necessarily. The hydro -- having 90% hydro from a water basis or a snowpack basis, we can still have normal hydro. A lot of it really depends on how it melts off.

Yes.

And that's every year. So if it gets hotter than blazes early and it all melts off early, that could be a bad -- a poor hydro year. On the other hand, like last year, in 2011, a long cool spring and a slow melt, as Scott said, we had one of the best hydroelectric years ever. So…

Yes.

Somewhere in between is normal.

Yes.

But we can still have normal hydro with the snowpack levels as they are. From a load perspective, we include in our estimates where the forecast of load is. That lower growth, that 1% customer growth in the economy really does not -- it is incorporated into our expectations.

Okay, but…

So any change -- if we have lower load than that, that would negatively impact us. And if we had -- and gas prices, if they've stayed low, that's a positive impact. If they go up, that's a negative impact. So I don't think it is much to the economy. It's changes to what our estimates are.

And there is no other question, so I'd like to turn our conference back over to Mr. Lang for closing comments.

I'd like to thank everyone for joining us today. We certainly appreciate your interest in our company. Have a great day.

Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may all now disconnect. Have a great rest of the day. Bye-bye.