October 24, 2012 in City

Ecova main cause of Avista woes, says CFO

By The Spokesman-Review
Rate hike plan still faces opposition from office

Not everyone is ready to sign off on Avista’s next rounds of rate hikes in Washington.

The state office tapped to look after consumer interests said Tuesday it can’t agree to the proposed settlement of Avista’s latest rate case, announced Friday between the Spokane utility and the staff of the Washington Utilities and Transportation Commission.

The proposal would allow Avista to raise electric rates 2 percent each of the next two years, plus raise natural gas rates 3.7 percent in 2013 and 0.9 percent in 2014.

The Public Counsel Section of the Washington State Attorney General’s Office said lower rates, not higher ones, are in order.

“Given the strong cases for a rate reduction and the message from customers that they can no longer absorb these annual rate increases, Public Counsel cannot support the proposed settlement,” said Simon ffitch, the section’s division chief.

The settlement, which still requires approval by the utilities commission, calls for a significantly higher shareholder profit margin than recommended previously by the commission staff and Industrial Customers of Northwest Utilities, ffitch said.

And it does not address key issues such as executive compensation and board of director costs, charitable contributions, image advertising and non-utility-related use of the corporate aircraft, he said.

He also criticized the agreement for allowing higher rates to go into effect in January, in the middle of the heating season.

Hearings on the proposed settlement will take place at the commission’s headquarters Nov. 29 and 30.

Avista Corp. brass sought to explain Tuesday why company profits are taking an unexpected dip this year, and they placed the blame largely on its non-utility operations, namely energy-services subsidiary Ecova.

But with the help of customer rate hikes and some belt-tightening, the Spokane-based utility said it expects to improve its performance in 2013.

Formerly known as Advantage IQ, Ecova saw revenue growth of about 13 percent in 2011, and Avista executives had expected the pattern to continue this year. But this week the Spokane-based utility lowered the revenue growth expectation to 5 percent, way off the mark.

“We recognize that missing our targets by a significant margin hurts our credibility,” Mark Thies, Avista’s chief financial officer, told market analysts in a conference call Tuesday morning.

Still, Avista believes Ecova can hit double-digit revenue growth targets again in 2013, Thies said. “I understand that based on the performance in 2012, you may be skeptical, so we are going to have to prove it,” he said.

To get the best value from Ecova, Avista may consider selling or spinning it off as a separate public company, President and CEO Scott Morris said.

“We know long-term 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 as part of our company,” Morris said.

Losses on other business investments also have hurt Avista’s bottom line this year, company officials said.

One was a $1.7 million writedown on Avista’s 4 percent stake in ReliOn, a Spokane-based fuel cell technology developer. Formerly known as Avista Labs, ReliOn was spun off from Avista on the success of its hydrogen fuel cell technology that serves as backup power sources.

Another loss was Avista’s $700,000 write-off of its investment in GreenVolts Inc., a 7-year-old California firm that developed solar energy systems that concentrate sunlight. Bowing to stiff competition, GreenVolts ceased operations last month and laid off about 80 employees.

But much of Tuesday’s discussion was about Ecova, the operation that combined Avista’s Advantage IQ, started in 1995, with its 2009 acquisition of Portland-based Ecos.

Ecova, with about 1,300 employees, provides design and energy analysis to help companies save money through building systems and more efficient management.

Thies said Ecova’s expense management and energy management services grew more slowly than anticipated this year, and signing on new energy management customers is taking longer than usual.

In August, Avista stood by its expectations that Ecova would earn 16 to 19 cents per share this year. Now it’s telling investors to expect earnings of only 5 to 7 cents per share from Ecova operations.

The drop in Ecova’s business plus other investment disappointments led Avista to lower its 2012 earnings guidance to a range of $1.50 to $1.60 per share, down from a range of $1.65 to $1.85 per share.

Michael Worms, an analyst with BMO Capital Markets, questioned Avista executives on their confidence in Ecova going forward and why they mentioned possibly selling it at some point.

“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 really pay the penalty,” Worms said in Tuesday’s call.

“We do,” Morris replied.

Avista’s stock price fell about $1.40 since Friday’s close, to $25.03.

Executives also expressed optimism Tuesday about 2013 earnings projections, in part because of an agreement announced Friday in Avista’s proposed rate increases in Washington.

The state’s Utilities and Transportation Commission staff and Avista propose allowing the utility to collect an additional $19 million in revenue in 2013 and $15.4 million in 2014 through higher electric and natural gas rates.

The settlement includes a provision that no additional rate hikes would take effect until January 2015.

“We believe the settlement provides a framework for positive outcomes for both our customers and shareholders for the next two years,” Morris said.

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