Avista Corporation

Good morning, and welcome to the fourth quarter 2018 earnings conference call. My name is Brandon, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, during which you can dial star 1 if you have a question. Please note, this conference is being recorded, and I will now turn it over to Jason Lang. You may begin, sir.

Thank you, Brandon. Good morning, everyone. Welcome to Avista's fourth quarter and fiscal year 2018 earnings conference call. Our earnings were released pre-market this morning and are available on our website. Joining me this morning are Avista Corp. Chairman of the Board and CEO, Scott Morris, Senior Vice President and CFO, Mark Thies, Avista Corp. President, Dennis Vermillion, Vice President, External Affairs, and Chief Customer Officer, Kevin Christie, and Vice President and Controller, Ryan Crassels. 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 2017 and 10-Q for the third quarter of 2018, 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 fourth quarter of 2018 were $0.70 per diluted share compared to $0.42 for the fourth quarter of 2017. For the full year, consolidated earnings were $2.07 per diluted share for 2018 compared to $1.79 last year. Now, I'll turn the discussion over to Scott.

Well, thank you, Jason, and good morning, everyone. To start off, I want to express my deepest gratitude to everyone who worked with us on the Hydro One transaction over the last 18 months. Throughout this process, we were able to achieve remarkable collaboration with the various parties involved, including the staffs in Washington, Idaho and Oregon, public council in Washington, as well as the parties in Montana and Alaska, just to name a few. And because of this joint effort by all parties, we were able to reach agreements that were unprecedented in our industry. We were committed to ensuring the transaction would best serve the interests of our stakeholders, and the agreements reflected this commitment. And while we're disappointed that we were not successful in obtaining timely regulatory approval, I want to celebrate the tremendous effort by everyone involved. The agreements that we reached emphasized our values. And as a company, and as who we are as a company, dedicated to innovative thinking and serving the interests of all of our stakeholders, our customers, our employees, our communities, and our shareholders. The agreements reached contain unprecedented safeguards. and outstanding benefits to all our stakeholders. We believe the agreements would have allowed us to operate as an independent utility and continue to provide the same level of service. Hydro One would have been a great partner. We enjoyed collaborating with their employees on the transaction, and I want to thank all of them for their outstanding effort over the past 18 months, and we wish them well in the future. Lastly, I want to thank our employees who never let this transaction distract them from providing safe and reliable energy and unequal dedication to our customers and our communities. And even though the transaction was not completed, we believe that Avista is well positioned and we look forward to building on our nearly 130-year legacy. Looking ahead, We like our strategy and we remain focused on running a great utility and continue to invest prudent capital to maintain and update our infrastructure and provide reliable energy services to our customers. And to facilitate that timely recovery of our costs, including capital investments that are not included in our current rates, we expect to file general rate cases in Washington, Idaho, and Oregon in the first half of 2019 with requested effective dates in early 2020. And in addition to continued prudent capital expenditures at the utility, we expect to invest about $19 million at our other businesses in 2019. This is mainly related to economic development projects in our service territory that will showcase the latest energy and environmental building innovations and house several local college degree programs. Looking back to 2018, we're pleased with our earnings results. Avista Utilities and AEL&P had earnings that were above our expectations. We're initiating our 2019 earnings guidance with a consolidated range of $2.78 to $2.98 per diluted share, which includes $1.01 per diluted share for the termination fee received from Hydro One and the payment of remaining transaction costs. So at this time, I'm going to turn it over to Mark.

Thank you, Scott. Good morning, everyone. I always like to start out with my hockey reference. The Blackhawks have won six in a row, and we're back in the playoff discussion, so things are looking up. For the fourth quarter of 2018, Avista Utilities contributed 66 cents per diluted share compared to 44 cents last year. For the full year, Vista Utilities was $2.04 per diluted share, an increase from $1.77 last year. The increase in the fourth quarter and in the year to date was primarily due to general rate increases, customer growth, and a decrease in transaction costs spent in 2018 versus the cost in 2017, partially offset by increased costs, interest and depreciation, and operation and maintenance. As Scott said, we continue to be committed to investing the necessary capital in our utility infrastructure, and we expect Avista Utilities' capital to be about $405 million, and AEL&P's capital to be about $9 million in 2019. For liquidity, in January, we received a $103 million termination fee from Hydro One for the purpose of reimbursing our transaction costs, including related income taxes. And we had $51 million of these costs incurred from 2017 to 2019. The balance of the termination fee will be used for general corporate purposes and reduces our need for external financing. In 2019, we expect to issue $165 million of long-term debt and up to $50 million of equity in order to refinance maturing long-term debt fund our planned capital, and maintain an appropriate capital structure. I want to spend a little bit of time on our earnings guidance this year, and just to make sure things are clear. As Scott mentioned, we're initiating guidance to be in the $278 to $298 per diluted share, which includes $1.01 per diluted share related to the termination fee and related costs. Due in part to the ongoing regulatory proceedings for the Hydro One transaction for the past 18 months, we elected not to file general rate cases in 18 so the commissions could focus and their staffs could focus on the merger proceedings. While we received a base rate increase effective January 1 in Idaho related to a two-year plan that we had approved in 17, we have not had base rate relief in Oregon since November of 17 and Washington since May of 18. And during 17 and 18, we continue to invest in our utility infrastructure to maintain and enhance our system, and only limited portions of these costs are reflected in current rates to customers. As such, we expect to incur regulatory lag through 19 through 21 due to the delay in our rate case filings. We plan to file rate cases in Washington, Idaho, and Oregon in the first half of 2019 with requested effective dates in early 2020 to begin remedying the regulatory lag. Going forward, we'll continue to strive to reduce the timing lag and more closely align our earned returns with those authorized by 2022. To achieve this, we anticipate an earnings growth rate of 9 to 10 percent from 2020 to 2022. We're using 2019 as a base but we're also removing the termination fee from that. So if you look at our guidance, you take out the dollar one termination fee, and then that base for the utility is what we're growing at the nine to 10% from 2020 to 2022, and then our normal four to 5% growth rate beyond 2022. And again, this assumes timely and appropriate rate relief in each of our jurisdictions. Our 2019 earnings guidance encompasses unrecovered structural costs that reduces our return on equity by approximately 90 basis points. And in addition, our 2019 guidance includes regulatory timing lag estimated to reduce the return on equity by approximately 105 basis points, which results in expected return on equity for Avista utilities of approximately 7.5% in 2019. We expect the VISTA utilities to contribute in the range of $2.72 to $2.86 per diluted share in 19, which includes a $1, again, per diluted share of the termination fee received from Hydro One and offset by the payment of remaining transaction costs. The midpoint of our guidance does not include any expense or benefit under the IRM in Washington. Our current expectation for the IRM is to be in a benefit position with a 90% customer, 10% company sharing ban, which is expected to add $0.07 a share per diluted share. Our outlook for Avista Utilities assumes normal precipitation, temperatures, and hydroelectric generation for the year. For 2019, we expect AEL&P to contribute in the range of $0.09 to $0.13 per diluted share, And our outlook for AALP also assumes normal precipitation and hydroelectric generation for the year. We expect our other businesses to be between a loss of three cents and a loss of one cent per diluted share, which includes costs associated with exploring strategic opportunities. Our guidance generally includes only normal operating conditions and does not include unusual items such as settlement transactions or actual positions or dispositions until the effects are known. So I'll now turn the call back over to Jason.

Thanks, Mark. Brandon, we'd like to open the call up for questions.

Thank you. We'll now begin the question and answer session. If you have a question, please press star 1 on your telephone keypad. If you'd like to be removed from the queue, please press the pound sign or the hash key. If you're on a speakerphone, please pick up your handset first before dialing. Once again, if you have a question, please press star 1 on your telephone keypad. And from Exodus Point, we have Andrew Levi. Please go ahead.

Hi, guys. Can you hear me?

Yeah, we can, Andy.

How are you? Long time.

Good. Yourself? Yeah, long time.

Welcome back. Just a couple questions, if you don't mind. First, just on the balance sheet, because I see you're issuing 50 mil. Where should your, I guess, whether we focus on, I don't know if you're more focused on the equity ratio or at the utility or your FFO to debt, but can you kind of just talk about that? Where are you going to be at the end of the year and what metrics you're focused on and what the metrics should be?

So what we strive to do is maintain a prudent capital structure and achieve an equity ratio for our jurisdictions that is in line with what's allowed or authorized by each of our commissions, and those vary by jurisdiction. but that's how we look at how much equity we need to raise in a given year. And so that's really the metrics that we look at. We also look at our FFO and our rating agencies to make sure that we're maintaining investment-grade, strong investment-grade credit ratings, and that takes part of it. But the level of equity really is designed to maintain the equity ratio for our utility jurisdictions.

I understand. So, again, I didn't look at your balance sheet. I apologize. But So I guess looking at where you are at your end, and then you had the $100 million come in, you had to pay tax on that, whatever it was. But between that and the $50 million, that kind of gets you where your equity ratios need to be on a regulatory basis. And then as you look into 20 and 21, can you give us any guidance there on how we should kind of be modeling the equity?

We haven't really given, Andy, we haven't really given guidance on on what we need for equity there. A lot of that we continue to, depends on our, you know, as we continue to deploy capital and what type of relief we get from our jurisdiction. So we give that on an annual basis. We historically don't give that farther than that. We can consider that in future calls, but we have not done that.

Got it. And then just to make sure, I mean, you were pretty clear on the guidance, but so we're using $1.88 midpoints. And then we take the $1.88 and grow that 9%, 10% every year, or is that only in 2020 that we grow off of 2020?

Again, this takes some relief in our jurisdictions, but that's an annual growth rate to allow us to get back to earning our allowed return by the end of 2021 and into 2022.

But is that off the $1.88 in 2019 or off what you earned in 2020?

I think it's $1.87, $1.87, $1.88, yes.

Okay, so $1.87, okay, so that has you chugging around $2 in 2020. And hold on, sorry.

You can do the math, Andy.

Yeah, yeah, okay. So it's like a $2.20 type number for 2020 and 2021. Okay, so that's very, very clear, and that assumes – Just on the rate relief portion, would you be filing for kind of larger cases than you have in the past because of the lag and lack of filings, or how should we think about the size of the cases?

Hi, Andy. This is Kevin Christie. We'll be moving forward. We need to finalize our numbers and get a better handle on exactly what the filings will look like, both on the electric and gas side in each jurisdiction. But we are... making up for rate lag, timing lag related to capital that we do not have in rates yet. So we can't share a number with you right now, but that's what we're going to be doing as we move forward, assuming that we get support from our commissions.

Okay. You guys are very clear. I really appreciate it, and I guess you guys will be up in Boston for Julian's thing?

I don't know. I know that's coming up. I don't know what conference it is.

Yeah, come on. Come to the conference. Come on, we've got to meet with you. It's time to get back on the road. But thank you very much.

Thanks, Andy.

Yep.

And from KeyBank, we have Paul Rizzo. Please go ahead.

Thank you. So in the third quarter, you said you needed about $110 million of equity. You're getting $52 from the breakup fee. And now you're telling us you only need $50. Kind of what backfilled there? Was it just the strength of 2018 where that finally came out?

No, there was, so if you recall, Andy, or Paul, sorry, got to get to my next question.

Sorry, Paul. Oh man, man, that hurt.

I know, I apologize, Paul. I apologize. So, you know, when we had our guidance last year in the third quarter, we were assuming that the transaction would close in the year, in 2018. With the closure of that transaction, there was significant other costs associated with the transaction. which would have reduced our equity and we would have needed more of an infusion from Hydro One to balance our capital structure. So those costs didn't occur, right?

That's the rate relief that you would have booked?

Well, it's not rate relief, it's equity. It was an equity contribution and we had expenses associated with the transaction that we would have had to pay at that time and they didn't occur. So that was included in our equity needs last year in that $110 million. So right now, this is the equity we need. We got the termination payment, less the fees, and then we expect to issue an additional $50 million this year to balance our capital structure.

Got it. And then just a little confused on wording, and I got more confused after the last question. The 9 to 10 earnings growth is 20 to 22, or is that 19 to 22? So I'm trying to get that.

Nineteen is the base year, right? And then you'll grow in 20, 21, and 22.

But between 19 and 20, does that also incorporate the 9 to 10?

Yes, it does. It's an annual growth rate.

The way you phrased it, the release said 20 to 22, so I wasn't sure what was the bridge between 19 and 20. But thank you for the clarification. That's helpful. Thank you. And kind of at other... You're exploring other opportunities. Can you give us some flavor? Is that all energy-related and energy efficiency type of stuff that you've explored in the past?

Yes, Paul. This is Scott. Yes, we are looking at some opportunities primarily around distribution, automation, and innovation, and some other things that we have our engineering teams and others working on. There are some interesting things out there in the marketplace, so I will continue to investigate some of those.

Thank you very much.

Thanks, Paul.

And from Glenrock Associates, we have Paul Patterson. Please go ahead.

Hey, good morning. Good morning, Paul. A lot of questions answered, but I just want to touch base on a few of these things. The ROE, the 90 basis point structural deficit, so to speak, You don't see any change in that, is that correct?

No, we expect that. That's been historically there for a long time. It went up a little bit. It used to be a little lower, but because of tax reform, we get less of a tax benefit from it. So at the end of the day, those costs didn't really change, but it ended up being slightly higher. I think we used to have it at 70 or 80 basis points, and now it's 90, but that's all due to tax reform.

And you don't see that changing over the next few years?

No, those costs are kind of historic. Most of them mix up primarily as executive incentives, board of directors costs. I understand.

I got you. But then just sort of looking forward here, I mean, you guys obviously went through a major transaction effort. Any sort of thought we should have in terms of lessons learned or the outlook in the future for possible combinations or activity that you'd like to share with us?

What I would say is this, is that the Hydro One deal was an extraordinary opportunity for all of our stakeholders. I mentioned that the safeguards that we were able to get were unprecedented in the industry. We got tremendous value for our shareholders, but we also got tremendous values for our customers, our employees, and our communities. Being a utility that operates in five states and having some of those states being net benefit states, It's extremely challenging to do anything in our states, and you have to be very focused and have to have an absolute commitment to all four legs of that stool to get anything accomplished in our five states. And even having unprecedented safeguards and value, it still was not accepted. So we'll continue to work really hard on our strategies. We like our future, and we're going to continue to stay focused on what we need to do to move this company forward.

Nonetheless, it was kind of an unusual situation with the sort of political developments in Canada. And I'm just wondering, that seemed to factor somewhat, I would say perhaps not insignificantly, in the regulatory outcome. So I guess what I'm wondering is, does that mean that you might again pursue something like that, perhaps without the potential political issues?

You know, we... I don't want to speculate because we really need to stay focused on what we want to do to get this company back on track from a regulatory lag perspective. I can just say that we operate in five states with some very different political agendas right now, particularly from an energy perspective. You've got Washington and Oregon, very different from Idaho and Montana. And Alaska is different there. So there's a lot going on on multiple levels, not just from a regulatory perspective, but from an environmental perspective, from a community expectation perspective. And all of that has to be added into any kind of thing that we do in regards to doing something successfully from a regulatory perspective and getting it approved. So while, yes, there was an agenda in Toronto that was disappointing for us and how it turned out, I would just say that it's a challenging environment no matter what we do in five states given the diverse ideas and objectives of our stakeholders.

Okay, great. And then just finally on the 2019 regulatory filings, after those filings, after this initial SEV 2019 filings, what is your expectation for going in for rate relief during this forecast period that you laid out for us? In other words, how many times, I mean, like you guys said that you were holding back basically during the Hydro One merger. After this initial group filings, how should we think about it going forward? Do you follow me? How often do you expect to be back in the regulatory arena after this first initial set of filings?

This is Kevin Christie. Due to the The rules within each state varies. We'd expect to need to be back in Washington somewhat soon after the next case. In Idaho, yet to be determined. Oregon, we have to work through what our filing looks like this time around, and then we'll go from there.

Okay. Thanks so much.

Thanks, Paul.

From Guggenheim, we have Char Parisa. Please go ahead.

Hi, good morning. It's actually Constantine Ledna for Char. Thanks for taking the questions. Good morning. Good morning. A lot of the stuff was already answered, and I just wanted to clarify a little bit. When you talk about appropriate rate relief and kind of going in for these rate cases, are there any kind of broad assumptions that we can think of in terms of the ask that's going to be put in front of the commissions, like ROE's capital structure, is that staying relatively the same, or... What's the plan there?

I think our requests have historically been consistent there, and we wouldn't anticipate significant movement from that. What we really, the reason for the request, as Kevin mentioned earlier, is the significant capital we've been spending over the last several years, and we expect that capital spend to continue as we have needs in our system to maintain the vibrancy of the system. So we're going to have to file rate cases immediately. consistently there, and we're not looking, I don't think, Kevin, as a perspective of changing significantly our ask for return or capital.

No, this is Kevin. I would expect that to be pretty consistent with past practice. It's all about capital that's been spent and recovering that.

Okay, yeah, and you've got it on rate-based. One other kind of small nuance. I think in the prepared remarks you mentioned a structural lag in roughly 100 basis points, or is that expected to be the 90 that you talked about?

The 90 was what we refer to as structural, and the 105 basis points in 19 was a regulatory timing lag.

Okay. Got it. Thank you for clarifying that. Thank you. You're welcome. That's about it for me.

Thank you.

From Avon Capital, we have Vidula Murthy. Please go ahead.

Good morning. Hi, Vidula. Hi, I'm good. When we take a look at the, again, same old topic, I guess, the VISTA utilities, you know, if you use excluding the $1, your guidance is $171 to $185. When we think about the 9% to 10% growth rate for three years that you're targeting to normalize your ROE, we should exclude the seven cents that you anticipate this year from IRM as part of that growth trajectory, or do you feel that for some reason that the IRM will be able to be maintained around seven cents consistently over the forecast period?

When we're talking about the growth rate, we're talking about the midpoint of our guidance, and we exclude the IRM from that. The IRM is based on power supply, and right now we're not filing for power supply costs based on our last commission order in Washington, but that can change as the teams work on things. So what we guide to is the midpoint of our guidance excluding the IRM, and that growth rate is off the midpoint of our guidance on a consolidated basis.

And also kind of a different topic. My understanding is that Westmoreland Coal, who is the coal supplier for Coal Strip, is currently in a bankruptcy proceeding and that there is an issue potentially about repricing the coal as part of the bankruptcy restructuring for coal strip that could affect obviously field tariffs or that type of thing. I'm just wondering, can you kind of explain to me or update me on kind of where that stands and what it may or may not mean for you guys?

Well, that's an ongoing, I mean, their bankruptcy is their bankruptcy. You're correct, they're in bankruptcy. And that's an ongoing negotiation between the parties, and we don't really comment on that until we have something to comment on. So, you know, to the extent something comes out and if it impacts us, then, you know, we'll put out future guidance on that. Right now we're expecting that we have a contract that we'll continue to supply coal to that plant and we'll operate until we know differently.

If for some reason the – resolution of the bankruptcy results in a higher coal contract price. What would be the mechanism to deal with that? Would it simply be another regulatory filing or is there some other ways or it can't be handled?

Well, it goes, I mean, power supply costs, it would run through our power supply costs and that runs through the energy recovery mechanism, the ERM, and then to the extent that you know, our base power supply costs changed enough, we would have to consider as part of a general rate filing for that. But that's, you know, that's all part of a normal filing. It runs through the IRM. And, you know, I don't know what the resolution of this will be. And when we know more and have more color, we'll provide information to the market.

So basically, if coal prices were to actually end up being lower as a consequence of this, then that would go through the fuel tariff and would be a net benefit under the current IRM, and if resolution and emergence resulted in higher coal contract pricing, that again would go through the IRM and would kind of cut the other way.

Yes.

Okay. Thank you very much.

Thank you, Vidula.

Once again, if you have a question, please press star 1, and we do have a follow-up from Paul Ridson. Please go ahead.

When you file in Washington, do you anticipate bringing up a multi-year rate plan again or kind of what's the strategy there?

Kevin, again, no, due to a court order in our 2015 GRC, it doesn't look like it will be feasible to file a multi-year rate plan this time around. So we'll file one, assess how it goes, and then go from there.

And then the comment was, You look to have rates in place for early 2020. Are you going to ask the commissions to do anything extraordinary as far as regular timing of rate cases to make that happen?

No.

Okay. So you should be filing in fairly short order, I would assume. Is that fair?

That's a fair statement.

Okay. Thank you again.

Thanks, Paul.

We're standing by for any further questions.

That seems to be all of our questions, so I would like to thank everyone for joining us today. We certainly appreciate your interest in our company. Have a great day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for joining us. You may now disconnect.