20080707AVU to Staff 86, 173, 184.pdf

Avista Corp.
1411 East Mission P.O. Box 3727
Spokane. Washington 99220-0500
Telephone [phone]
Toll Free 800-727-9170
~~~'iI'STA.
Corp.
in. . no'),tv. \.'-
July 3,2008
Idaho Public Utilities Commission
472 W. Washington St.
Boise, il 83720-0074
Attn: Scott Woodbury
Deputy Attorney General
Re: Production Request ofthe Commission Staff in Case Nos. A VU-E-08-01 and
A VU-G-08-01
Dear Mr. Woodbury,
Enclosed are an original and three copies of Avista's responses to IPUC Staffs production
requests in the above referenced docket. Included in this mailing are A vista's responses to
production requests 173 & 184, and Supplemental Response #3 to 086. The electronic
versions of the responses were emailed on 7/3/08 and are also being provided in electronic
fonnat on the CDs included in this mailing.
If there are any questions regarding the enclosed information, please contact me at (509) 495-
8620 or via e-mail atpat.ehrbar~avistacorp.com
Sincerely,Q~~
Patrick Ehrbar
Regulatory Analyst
Enclosures
.
.
.
JURISDICTION:
CASE NO:
REQUESTER:
TYPE:
REQUEST NO.:
REQUEST:
A VISTA CORPORATION
RESPONSE TO REQUEST FOR INFORMATION
IDAHO
A VU-E-08-01 / A VU-G-08-01
IPUC
Production Request
Staff-086 Supplemental#3
DATE PREPARD:
WITSS:
RESPONDER:
DEPARTMENT:
TELEPHONE:
07/02/08
Malyn Malquist
Patrck Ehrbar
State & Federal Reg.
[phone]
Please provide copies of all reports on Avista by rating agencies and securities analysts for 2007
through 2008 as they become available.
RESPONSE:
Attached is "StafCPR_086-S-Attachment C.pdt' which is a Ladenburg Thalmann analyst update.
Staff_PR_086-S-Attachment C.pdf Page 1 of 6
AVISTA CORP (AVA)
Advantage IQ Acquires Cadence Network - Reiterating BUY Rating
COMPANY & MARKET DATA
Price
Price Target, Excl Dividends (YE08)
52 - Week Range
Mkt. Capitalization (mil)
Enterprise Value (mill)
FD Shares Outstanding (mil)
Avg. Daily Trading Vol. (000)
Book Value per Share (1Q08A)
Dividend (FY08E) I Yield
$21.46
$26.00
$23.56-$17.80
$1,137
$2,153
53
361
$17.70
$0.66 3.1%
Revenue (mil).1QEPS
2QEPS
3QEPS
4QEPS
EPS
Prior EPS
Consensus EPS
PIE
EV/EBITDA
P/FCF
024
."
FY2007A
1,418
$0.26
$0.26
$0.00
$0.26
$0.72
29.8x
9.1x
119.3x
Sep-06 '..7
FY2009E
1,526
FY2008E
1,453
$0.47
$1.44 $1.80 .
$1.46 $1.79
$1.47 $1.68
14.9x 11.9x
7.7x 7.3x
119.3x 1989.2x
.
Jul.Q7 Oec.(7 Mo,..
:~~~::-I~I.~~J
Chart data: Bloomberg
Highlights
. We are reiterating our BUY rating on AVA. Our price target
of $26 per share is based on our calculated 2008 sum-of-
the-parts analysis of $23-$26 per share a 2008/2009 target
PIE ratio of 18.0x/14.4x.
. On June 30, 2008, AVA announced that its wholly-owned
subsidiary, Advantage ia, has acquired Cadence Network,
a privately-held Cincinnati, Ohio-based company. Terms
of the transaction include the transfer of a 25% minority
stake in Advantage ia to Cadence Network shareholders.
. Due to AVA's decreased ownership interest and one-time
transition costs ($500,000) we expect the deal to be slightly
dilutive to 2008 earnings by approximately $0.01-0.02 per
share. According to the company, Cadence Networks'
2007 revenues totaled $15m, operating margins were 5%
and growth is estimated at 25-30%.
We expect accelerated revenues and earnings growth
beginning in 2009 supported by the combined company's
service synergies creating cross-sellng products/services
opportunities. Importantly, Cadence Network specializes in
helping companies manage energy costs and their carbon
footprints which we view as attractive high-growth emerging
markets.
By gaining scale and scope and diversifying its revenue
stream through the Cadence Network acquisition,
Advantage IQ accelerates its plans for growth and the
potential monetization. According to the company, it plans
to monetize its investment in Advantage ia during the next
2-4 years through an IPO or asset sale. We view the
acquisition favorably.
Brian J. Russo, CFA
646-432-6312
brusso(§ ladenbu rg. com
Disclosures and Analyst Certifications can be found in Appendix A..
NEW YORK. NY HOUSTON. TX COLUMBUS.OH MELVILLE. NY PRINCETON. NJ LOS ANGELES. CA LUTZ. FL MIAMI. FL LINCOLNSHIRE. IL BOCA RATON. FL
153 East 53'd Street . New York, New York 10022 . Telephone: [phone]-LAD-THAL
Member New York Stock Exchange, American Stock Exchange, FINRA, and SIPC
Staff_PR_086-S-Attachment C.pdf Page 2 of 6
AVISTA CORP (AVA)
.Investment Conclusion
Reiterating BUY Rating
We are reiterating our BUY rating on AVA. Our price target of $26 per share is
based on our calculated 2008 sum-of-the~parts analysis of $23-$26 per share a
2008/2009 target PIE ratio of 18.0x/14.4x.
Advantage IQ Acquires Cadence Network
On June 30, 2008, AVA announced that its wholly-owned subsidiary, Advantage
ia, has acquired Cadence Network, a privately-held Cincinnati, Ohio-based
company. Terms of the transaction include the transfer of a 25% minority stake
in Advantage ia to Cadence Network shareholders.
Due to AVA's decreased ownership interest and one-time transition costs
($500,000) we expect the deal to be slightly dilutive to 2008 earnings by
approximately $0.01-$0.02 per share. According to the company, Cadence
Networks' 2007 revenues totaled $15m, operating margins were 5% and growth
is estimated at 25-30%.
.
We expect accelerated revenues and earnings growth beginning in 2009
supported by the combined company's service synergies creating cross-selling
products/services opportunities, as well as, additional penetration into the higher
growth demand side management and environmental service/consulting markets.
Cadence Network specializes in helping companies manage energy costs and
their carbon footprints. Cadence delivers comprehensive utility
telecommunications and lease facility expense management to more than 150
multiple-site businesses nationwide.
Under the terms of the transaction, the minority owners can exercise a right to
redeem their shares (during July 2011 or July 2012) at fair market values during
certain time periods if Advantage ia is not monetized and redemption rights
expire July 31, 2012. A potential monetization could be executed through an
initial public offering or sale of the business. According to the company, it plans
to monetize its investment in Advantage ia during the next 2-4 years. Cadence
Networks was owned by Insight Venture Partners, a venture capital firm.
The combined company wil remain a subsidiary of AVA, maintain the name
Advantage ia, remain headquartered in Spokane, WA, and maintain existing
offces in Cincinnati, Denver and Atlanta. Advantage 10 President and CEO Stu
Stiles will continue to lead the organization and former Cadence Network
President and CEO Jeff Hart wil become COO at Advantage ia.
Upcoming Events to Monitor
Upcoming events/initiatives to monitor include updated dividend policy (August
2008), Staff and Intervenor testimony to be filed in Idaho (August 15, 2008), Staff
and Intervenor testimony to be filed in Washington (September 12, 2008).
2008 and 2009 Cash and Earnings Expectations
Ladenbur Thalmann & Co. Inc. Pa e - 2 -
We adjusted our 2008 earnings expectations to $1.44 per share (previously
$1.46 per share) to reflect the sale a 25% interest in AVA's Advantage ia to
Cadence, expected transition costs, partially offset by estimated Cadence sales
and earnings contribution.
.
Staff_PR_086-S-Attachment C.pdf Page 3 of 6
AVISTA CORP (AVA)
.We expect 2009 earnings of $1.80 per share (previously $1.79 per share). Our
estimates assume full year of Cadence Network contribution, normal weather,
organic growth, full year of interest expense savings and rate relief partially offset
by higher operating expenses related to net plant additions and increased fully
diluted shares outstanding. We conservatively estimate that AVA is granted 50%
of its rate request in Washington and Idaho totaling approximately $0.30 per
share in earnings.
Primary Risks
The primary risks of an investment in AVA shares include (but are not limited to);
pending Oregon general rate case, under-recovery of volatile supply costs
including power, fuel and natural gas, regulatory allowance of the recovery of
power and gas costs, operating costs and capital investments, uncertain stream
flow and weather conditions, legislation/regulation changes, generation plant
availabilty (unplanned outages), access to capital markets, litigation, pension
requirements, changes in wholesale energy prices, execution risk, hydro
relicensing, changes in regional economy, increased employee related costs.
See Appendix A for additional risk factors.
Table 1: AVA -Sum-of-the-Parts
.
Sum.-f-the..art 2008E EBrrDA Low Base High Low Base High
Regulated Utiities 274,325 8.5 8.8 9.0 2.331.761.!2,400,343.1 2,468.924.3
Advantage 10 10,516 9.0 10.0 11.0 94,641.!105,157.2 115,672.9
Total Equity Value $284,840.65 2,426,403.3 2,505,500.2,584,597.3
Le..: 2008E Net Debt 1,092,543.1,092,543.1,092,543.3
Net Equit Value 1,333,860.1,412,957.1,492,053.9
I Net Equity Per Share $24.99 $26.47 $27.951
Shares outstanding 53.382.0 53,382.0 53.382.0
(in thousands)
r $ h)on per s are
Sum-of.the-Part 2008E EPS Low Base High Low Base High
Utiities $1.34 14.3 15.0 15.8 $19.11 $20.1 $21.2
Advantage 10 $0.10 20.0 25.0 30.0 $2.03 $2.54 $3.05
ITotal Equity Value Per Share $1.44 $21.14 $22.65 $24.17
Ladenbur Thalmann &. Co. Inc. Pa e - 3 -
Staff_PR_086-S-Attachment C.pdf Page 4 of 6
AVISTA CORP (AVA)
.APPENDIX A: IMPORTANT RESEARCH DISCLOSURES
ANALYST CERTIFICATION
I, Brian Russo, attest that the views expressed in this research report accurately reflect my personal views about the subject security
and issuer. Furthermore, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or
views expressed in this research report.
The research analyst(s) primarily responsible for the preparation of this research report have received compensation based upon
various factors, including the firm's total revenues, a portion of which is generated by investment banking activities.
COMPANY BACKGROUND
Headquartered in Spokane, Washington, Avista Corporation (AVA) is an energy company engaged in the generation, transmission
and distribution of electricity and distribution of natural gas as well as other energy-related businesses. The company's primary
subsidiaries are Avista Utilities, which operates AVA's regulated electric and natural gas operations in parts of Washington, Idaho and
Oregon, and Advantage IQ, the primary non-regulated subsidiary.
VALUATION METHODOLOGY
We value equities utilizing a multi-faceted approach which includes; sum-of-the-parts, net asset value, discounted cash flow, leading
PIE, EV/EBITDA.
RISKS
On top of normal economic and market risk factors that impact most all equities, Avista Corporation (AVA) is uniquely at risk to:
Timely and adequate rate relief is essential to maintain credit profile and earning a reasonable rate of return.
Maintaining and improving regulatory relationships is criticaL.
Political opposition to rate increases and demand elasticity. The rise in commodity prices and expectations of soaring customer utilty
.bilS this winter and throughout 2006E have manifested into a political issue in a number of states. Politicians (many of whom are up
or re-election) have used this issue as a political platform. The increasingly contentious political and regulatory environment in
several states has increased regulatory risk, in our opinion.
AVA operates in three states with majority of operations in Washington. Operating performance is dependent on continued solid
electricity demand growth. Any regional economic slowdown would negative impact results.
Rising fuel costs could adversely impact financial performance. High and volatile supply costs could negatively impact near-term
results. Any sustained uptrend in commodity prices could negatively impact AVA's operations at subsidiaries without timely pass-
through of fuel costs.
Rising interest rates could impact AVA's future cost of borrowing and stunt economic growth.
AVA has outlined a large capital expenditures program. Timely and adequate recovery of regulated asset investments is imperative to
maintain margins.
Pension obligations may require increased funding dependent on various market assumptions.
Unplanned outages at generating plants can increase the cost of power required to serve its customers given that the cost of
replacement power is typically considerably higher price than the company's cost of generation.
A reduction in precipitation (particularly winter snowpack) can negatively impact electric resource costs by decreasing hydroelectric
generation capability and increasing the costs for fuel to run thermal generation. This also increases the need for cash to purchase
electric resources in the wholesale market.
Regional precipitation and snowpack conditions typically have a significant effect on regional wholesale prices
Regulatory and litigation risk.
STOCK RATING DEFINITIONS
Buy: The stock's return is expected to exceed 15% over the next twelve months.
Neutral: The stock's return is expected to be plus or minus 15% over the next twelve months.
Sell: The stock's return is expected to be negative 15% or more over the next twelve months.
Investment Ratings are determined by the ranges described above at the time of initiation of coverage, a change in risk, or a change
en target price. At other times, the expected returns may fall outside of these ranges because of price movement andlor volatility. Suchinterim deviations from specified ranges wil be permitted but wil become subject to review.
Ladenbur Thalmann & Co. Inc. Pa e - 4 -
Staff_PR_086-S-Attachment C.pdf Page 5 of 6
AVISTA CORP (AVA)
.ATINGS DISPERSION AND BANKING RELATIONSHIPS
Buy 65% (14% are banking clients)Neutral 33% (3% are banking clients)Sell 2% (0% are banking clients)
INVESTMENT RATING AND PRICE TARGET HISTORY
láctèl1burg ThâlMOO& CO, Inc. ratírs to AVA (AVISTA CORP)
Closifg Price Jw 3Q, 2000: $21,46
, ,...-'0 . ,
~ ".-
~ ........~.~~ --"- ..
'-.. -..'.."...
.õc 2006 Apr Jul Oct 2007 Apr Jul oct 20a pr ju~5
L~'Q:~nd €! l;~'tiest.~rs ,COff)
¡¡",auy. i.,Ptkii T .itgii!
r; In iti ¡¡¡~ d/R"slJ rred Pnsitiv", ~.R ¡; it",r ;¡teo; P O'.s'l'l',"
.
Ladenbur Thalmann & Co. Inc. Pa e - 5 -
Staff_PR_086-S-Attachment C.pdf Page 6 of 6
AVISTA CORP (AVA)
eTHER COMPANIES MENTIONED: None
COMPANY SPECIFIC DISCLOSURES:
Ladenburg Thalmann & Co. Inc. does not make a market in subject company. Ladenburg Thalmann & Co. Inc. has not had an
investment banking relationship with subject company in the past 12 months. Neither the Analyst, nor members of the Analyst's
household own any securities issued by the subject Company, or other companies mentioned in this report.
GENERAL DISCLAIMERS
Information and opinions presented in this report have been obtained or derived from sources believed by Ladenburg Thalmann & Co.
Inc. believe to be reliable. The opinions, estimates and projections contained in this report are those of Ladenburg Thalmann as of the
date of this report and are subject to change without notice.
Ladenburg Thalmann & Co. Inc. accepts no liability for loss arising from the use of the material presented in this report, except that
this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to
Ladenburg Thalmann & Co. Inc. This report is not to be relied upon in substitution for the exercise of independent judgment.
Ladenburg Thalmann & Co. Inc. may have issued, and may in the future issue, other reports that are inconsistent with, and reach
different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and
analytical methods of the analysts who prepared them and Ladenburg Thalmann & Co. Inc. is under no obligation to ensure that such
other reports are brought to the attention of any recipient of this report.
Some companies that Ladenburg Thalmann & Co. Inc. follows are emerging growth companies whose securities typically involve a
higher degree of risk and more volatility than the securities of more established companies. The securities discussed in Ladenburg
Thalmann & Co. Inc. research reports may not be suitable for some investors. Investors must make their own determination as to the
appropriateness of an investment in any securities referred to herein, based on their specific investment objectives, financial status
and risk tolerance.
.past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty,
express or implied, is made regarding future performance. The price, value of and income from any of the securities mentioned in this
report can fall as well as rise. The value of securities is subject to exchange rate fluctuation that may have a positive or adverse effect
on the price or income of such securities. Investors in securities such as ADRs, the values of which are influenced by currency
volatility, effectively assume this risk. Securities recommended, offered or sold by Ladenburg Thalmann & Co. Inc. (1) are not insured
by the Federal Deposit Insurance Company; (2) are not deposits or other obligations of any insured depository institution; and (2) are
subject to investment risks, including the possible loss of some or all of principal invested. Indeed, in the case of some investments,
the potential losses may exceed the amount of initial investment and, in such circumstances; you may be required to pay more money
to support these losses.
The information and material presented in this report are provided to you for information purposes only and are not to be used or
considered as an offer or the solicitation of an offer to sell or to buy any securities mentioned herein. This publication is confidential for
the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or disclosed to another party,
without the prior written consent of Ladenburg Thalmann & Co. Inc.
Member: NYSE, AMEX, FINRA, all other principal exchanges and SIPC
Additional Information Available Upon Request
(92008 - Ladenburg Thalmann & Co. Inc. All Rights Reserved.
.
Ladenbur Thalmann &. Co. Inc. Pa e - 6 -
AVISTA CORPORATION
RESPONSE TO REQUEST FOR INFORMTION.JURSDICTION:
CASE NO:
REQUESTER:
TYPE:
REQUEST NO.:
IDAHO
A VU-E-08-01 / A VU-G-08-01
IPUC
Production Request
Staff-173
DATE PREPARD:
WITESS:
RESPONDER:
DEP ARTMENT:
TELEPHONE:
06/27/08
Greg Paulson
Greg Paulson
Customer Service
[phone]
REQUEST:
What is the expected useful life of the new automated meters? By meter type, is there any
evidence that suggests the meters may not perform for the same length of time as old-technology
meters? If so, please explain.
RESPONSE:
The life expectancy for the solid state electrc meters is 20 years. The life expectancy for the old
technology electro-mechanical electric meters is 38 years, but is not an applicable comparson to
the solid state electric meters because the electro-mechanical meters do not have any AM
capabilities unless equipped with a clip-on radio-based communication module. Those modules
have a life expectancy of 20 years, and are no longer readily available as the market has migrated
to solid state metering for AM applications.
. The life expectancy for natural gas endpoints (ERTs) that are attached to existing natural gas
meters is i 5 years based on battery life.
Avista's depreciation rates for meters are based on 38 year lives for electric meters and 40 years
for natural gas meters. These lives were detennined during the 2005 depreciation study and based
on the electromechanical and natural gas meters used by Avista at that time. When the new AMR
metering equipment is moved to plant in service (currently planned for January 1, 2009) the
existing meter plant accounts will be used to record all meter costs (FERC Account 370 for electrc
meters and FERC Account 381 for natural gas meters.) Since the lives of the new metering
equipment is significantly less than the existing meters, the lives/depreciation rates will be
adjusted during our next depreciation study.
.
.
.
.
JUSDICTION:
CASE NO:
REQUESTER:
TYE:
REQUEST NO.:
REQUEST:
AVISTA CORPORATION
RESPONSE TO REQUEST FOR INFORMATION
IDAHO
A VU-E-08-01 / A VU-G-08-01
IPUC
Production Request
Staff-l 84
DATE PREPARD:
WITNESS:
RESPONDER:
DEPARTMENT:
TELEPHONE:
07/01/08
Don Kopczynski
Mary Broemeling
Energy Solutions
[phone]
As referenced in Company witness Morrs's testimony, please provide a copy of the results of
Avista's 4th Quarter 2007 Customer Satisfaction Survey.
RESPONSE:
Please see the Company's response to StaffPR-067.