Avista Corporation

Welcome to the Q3 2019 earnings conference call. My name is Adrienne, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. During the question-and-answer session, if you have a question, please press star, then 1 on your touch-tone phone. Please note this conference is being recorded. I'll now turn the call over to John Wilcox, Investor Relations Manager. John Wilcox, you may begin.

Thanks, Adrian, and good morning, everyone, and welcome to Avista's third quarter 2019 earnings conference call. Our earnings were released pre-market this morning and are available on our website. Joining me this morning are Avista Corp President and CEO Dennis Vermillion, Executive Vice President, Treasurer, and CFO Mark Theis, Senior Vice President, External Affairs, and Chief Customer Officer Kevin Christie, and Vice President, Controller, and Principal Accounting Officer, Ryan Crassel. 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 2018 report and 10Q for the third quarter of 2019, 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 2019 were $0.08 per diluted share, compared to $0.15 for the third quarter of 2018. For the year to date, consolidated earnings were $2.21 per diluted share for 2019 compared to $1.37 last year. Now I'll turn the discussion over to Dennis.

Well, thanks, John, and good morning. I'm very excited to be here today, and I'm deeply humbled by the honor and privilege to serve as Avista's chief executive. I've been at Avista for 34 years, and as Avista's president for the last 10 years, I've worked closely alongside Scott. He has been a great friend and mentor to me, and he has achieved so much for our shareholders, customers, employees, and communities we serve. And I know everyone at Avista is grateful for his leadership. I want to thank Scott for all that he has done throughout his career for our company, and we all wish him well in his retirement. We will miss him greatly, as he is no longer involved in the day-to-day operations of the company. But, of course, we look forward to continuing our work with him on the Board of Directors. At a time of great change in the energy industry, I am excited to meet the future head on, and I am confident that Avista is prepared to meet the challenges ahead, including achieving our clean energy goals that were actively set. Now, turning our attention to quarterly results, our earnings at each of our segments met our expectations for the third quarter, and we remain on track to meet our consolidated guidance for the full year. Regarding regulatory matters, in October, the Oregon Commission approved our natural gas general rate case settlement and new rates will go into effect January 15, 2020. In Idaho, we were able to reach an all-party agreement where, if approved, new rates would take effect on December 1, 2019. This outcome is in line with our expectations. In Washington, A settlement in principle has been reached in the current general rate cases with all parties and all issues with the exception of decoupling and energy recovery mechanism related issues. The settlement stipulation is in drafting stage and the parties including the public council unit of the Attorney General's Office and the Sierra Club are securing the necessary approvals in their respective organizations. The settlement stipulation is anticipated to be filed on or about November 21st, 2019, and will require commission approval. We believe that the terms of the settlement in principle are fair for our customers and shareholders. And finally, we continue to work through the regulatory process to the 2015 remand cases. And then finally, based on our 2019 results to date, For the full year of 2019, we are confirming our earnings guidance with a consolidated range of $2.83 to $3.03 per diluted share. This includes $1.01 per diluted share for the termination fee received from Hydro One in the first quarter, which was partially offset by the payment of related transaction costs. And now I'll turn this presentation over to Mark.

Thank you, Dennis. Good morning, everyone. My usual obligatory Blackhawks comment, we stink. We have not started out the season very well and need to turn it around. But fortunately, when we go to EEI this weekend, I will not be wearing a Rangers tie because we haven't played them yet. For the third quarter of 2019, the VISTA utilities contributed $0.09 per diluted share compared to $0.18 in 2018. The decrease over the prior year is due to an increase in operating costs, increased depreciation, and power supply costs mainly related to the urn. On a year-to-date basis, Avista Utilities contributed $2.11 per diluted share, an increase from $1.39 last year, and again, primarily due to the receipt of the termination fee from Hydro One, as well as a positive impact from general rate increases and customer growth. These increases were partially offset by transaction costs related to the Hydro One transaction and taxes associated with the termination fee, also increased transmission, distribution and O&M costs, and increased depreciation and amortization. In addition, in the second quarter, we announced a $7 million donation commitment that impacted our results. The energy recovery mechanism in Washington was a pre-tax expense of $2.4 million in the third quarter compared to a pre-tax expense of $0.2 million last year. And year-to-date, we have $1.1 million compared to a benefit of $5.6 million last year. We continue to be committed to investing the necessary capital in our utility infrastructure, and we expect the VISTA utilities capital expenditures to total about $435 million for 2019. Regarding liquidity, at the end of September, we had $179 million available liquidity under our committed line of credit, and in September, we entered into a bond purchase agreement to issue $80 million of first mortgage bonds in November of 2019. No further long-term debt issuances are expected for this year. During 2019, we expect to issue up to $65 million of equity, of which $42.9 million has been issued at the nine months ended September 30th. We intend to use the proceeds from our issuances to refinance maturing long-term debt. We have a $90 million maturity in December. Fund our capital expenditures and maintain an appropriate capital structure. As Dennis mentioned earlier, we are confirming our 2019 guidance with a consolidated range of $2.83 to $3.03 per diluted share, which includes $1.01 for the termination fee and the payment of related transaction costs. Going forward, we expect to continue to strive to reduce the regulatory timing lag and more closely align our earned returns with those authorized by 2022. To achieve this, we anticipate annual earnings growth of 9% to 10% from 2020 to 2022, with a return to our normal 4% to 5% growth rate following 2022, and this is consistent with the expectations we've set out all year. The earnings growth rate are based on the midpoint of our original 2019 earnings guidance as a starting point and exclude the $1 per diluted share related to the Hydro One transactions. These growth rates also timely and appropriate rate relief in our jurisdictions. We expect the VISTA utilities to contribute in the range of $2.72 to $2.86 in 2019, including the $1 for the termination fee. The midpoint of our VISTA utilities guidance does not include any expense or benefit under the IRM, and our current expectation is to be in a benefit position within the 75%, 25% company sharing, which is expected to add approximately $0.05 per diluted share. Our outlook for Avista Utilities assumes, among other variables, normal precipitation, temperatures, and below normal hydroelectric generation for the remainder of 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 them includes, among other variables, normal precipitation, and hydroelectric generation for the remainder of the year. We are other businesses to contribute earnings in the range of two to four cents per diluted share. Our guidance generally includes normal operating conditions and does not include unusual items as settlement discussions, acquisitions, or dispositions until the effects are known. I will now turn the call back over to John.

Thanks, Mark. We would now like to open up this call for questions.

Thank you. We'll now begin the question and answer session. If you have a question, press star, then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star, then 1 on your touchtone phone. And our first question comes from Richard Titralia from Bank of America. Your line is open.

Hey, morning. How are you guys doing? Hey, just curious if you can provide a little bit more details on the Washington rate case settlement, potentially around the return parameters and if it includes any forward-looking attrition adjustments, and what your expectations are for regulatory approval and timeline now?

Hi, this is Kevin Christie. Thanks for the question. We have a settlement in principle, and the details are not available until we file our stipulation on the 21st of November. So the details that you're looking for would be found there. I can say that we know that Washington's an 11-month approval period state, so we would expect to have final approval on the settlement, assuming that they approve it in April.

Got it. Thanks a lot. And then just curious why the remand case was pushed back, I guess, December 6th for the hearing, and what has been the receptiveness thus far to the $3 million settlement proposed?

This is Kevin. The date was moved back at the election of the commission, and I don't know exactly why, but my suspicion is that they needed more time to consider the arguments. Can you remind me of the second question you asked there?

Yeah, just the receptiveness, the $3 million settlement that was proposed in the case.

No, that was just what we provided in testimony as a potential compromise position with the parties.

Got it, but no commentary thus far on that?

We wouldn't expect commentary in the process, given where it's at. We're moving towards the hearing and litigation.

All right. Makes sense. Thanks a lot.

Thanks. And our next question comes from Phil Covello from Exodus Point. Your line is open.

Hi, guys. Thanks for taking my question. Morning. My prior question was actually just asked, but I just wanted one follow-up on the settlement stipulation. I guess just how confident are you that the Commission would uphold an eventual settlement? Because you know in the last several rate cases, I think there have been a few alterations or ultimately rejections of such settlements. So just trying to get a sense of your expectation there and how we might think about that.

This is Mark. Typically, in our history, when we've had all-party settlements with respect to general rate cases, the Commission has historically been favorable and approved those. The ones that you're referring to weren't really jet cases. Those were the transaction around the Hydro One transaction. And with all of the different things that occurred around the Hinder one transaction, the commission ruled against the all party settlement. They did that in, in, in each of the jurisdictions when we had them, but that was a completely different case. Historically in general rate cases, when we're talking about changing our rates with respect to our capital deployment and our expenses, they have been historically approved. That doesn't mean that in the future, they're automatically approved. The commission has to weigh the facts and circumstances of the case, but that's what's historically happened.

Okay. Thanks, guys.

And as a reminder to enter the queue, please press star then 1 on your touch-tone phone. And our next question comes from David Imani from Veration. Your line is open.

Hey, thank you. Congrats, guys, on the settlement. I think that's a huge positive. I'm just not sure if you can share any more color, but if it's possible, I'd be interested to hear a bit more settlement kind of came around. Because, you know, reading the intervener testimonies, I have to admit I'm pleasantly surprised that you guys were able to reach an all-party settlement. It seemed like there was kind of quite a spread and a bit asked there.

Yes, and that happens from time to time, and the parties always, when we have a process like this, the parties always get together and look to see if there's a way that we could compromise and reach a settlement, and sometimes we're able to, and sometimes we're not. In this case, it It took a couple of times. This was, I think, the second time around of having settlement discussions, and the parties were able to come together. And the details of that, they just really can't come out until we file them. And so that will be on or about, like Kevin said, the 21st of November, so a couple weeks. But, you know, we were able to get all the parties together and reach a settlement. So we did because we felt that it made sense for, like we said in our release, our customers and our shareholders. So we believe that's a positive.

Okay, awesome. Thank you. I agree. Bye.

Thank you.

And as a reminder, to enter the queue, please press star then 1 on your touch-tone zone. And we're standing by for more questions. And we have no further questions. I'll turn the call back over to the speakers.

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

Have a great day.