Avista Corporation

Welcome to the Q4 2019 Earnings Conference Call. My name is James, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. During the Q&A session, if you have a question, please press star 1 on your phone. And also note this conference is being recorded. I'd now like to turn the call over to John Wilcox. John, you may begin.

Thanks, James, and good morning, everyone. And welcome to Avista's fourth quarter and fiscal year 2019 earnings conference call. Our earnings and our 2019 Form 10-K were released pre-market this morning and are both available on our website at avistacorp.com. Joining me this morning are Avista Corp President and CEO Dennis Vermillion, Executive Vice President, Treasurer, and CFO Mark Thies, 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 Form 10-K for 2019, which is 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 2019 were $0.76 per diluted share compared to $0.70 for the fourth quarter of 2018. For the full year, consolidated earnings were $2.97 per diluted share for 2019 compared to $2.07 last year. Now I'll turn the discussion over to Dennis.

Well, thanks, John, and good morning, everyone. Our performance during 2019 was strong as we were able to achieve both our financial and operational goals while being on the forefront of innovation in our industry. Financially, we had a good year as our earnings for 2019 were in the upper half of our guidance, and Mark will provide further details on that a little bit later. Operationally, we are on track with one of the largest capital projects in our history, the deployment of advanced metering infrastructure in Washington. The development of this infrastructure will provide customers with more real-time data so that they can better manage their energy use. We also announced plans to join the Western Energy and Balance Market in 2022, which will expand our ability to integrate additional renewable energy into our electric generation resource mix and allow us to share resources and costs more effectively across a larger geographic area. We have continued to be on the cutting edge of innovation in our industry and region. In 2019, through our partnership with McKinstry, we began construction of the new Catalyst Building in Spokane, Washington, which is a zero energy, zero carbon, 159,000 square foot building, along with the Scott Morris Center for Energy Innovation. When these two projects are completed in 2020, A centralized system will provide energy to multiple buildings in the ecodistrict. Last year, we established our Clean Energy Goals with an ultimate target of serving our customers with carbon neutral electricity by the end of 2027 and carbon free electricity by 2045. We also donated $7 million to the Avista Foundation to support area communities to prevent homelessness, promote youth education and success, and support small communities in our service area over the years to come. We were proud to announce yesterday that Avista has been recognized as one of the 2020 World's Most Ethical Companies by Ethisphere, a global leader in defining and advancing the standards of ethical business practices. This is just a tremendous achievement, and it acknowledges how Avista interacts as a business and as people with our natural environment, communities, and employees. Our actions are mission-driven and values-based with a commitment to achieving our organizational goals in ways that deliver value for all of our stakeholders. We're honored to receive this recognition, which demonstrates the leadership of our employees and Avista's commitment to ethical corporate culture built on trust, integrity, and respect. In 2019, we reached settlements in all of our general rate cases with approvals by the commissions in Oregon and Idaho, and we are awaiting the decision from the Washington Commission on the partial settlement agreement for our 2019 general rate cases. We're also waiting on the decision for the 2015 remand case. Looking ahead, 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. To facilitate the 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 2020. We are initiating our earnings guidance with a consolidated range of $1.95 to $2.15 per diluted share, which represents over 9% growth from our midpoint of the original 2019 guidance, of course, excluding the effects of Hydro-1. This earnings guidance range assumes approval of our partial general rate case settlement by the Washington Commission. Lastly, earlier this month, the Board increased our dividend by 4.5% to an annual dividend of $1.62 per share. And at this time, I'll turn this presentation over to Mark.

Thank you, Dennis. Good morning, everybody. As stated in last quarter's call, my Blackhawks still stink. And we're in last place in the Central Division. We are mathematically alive for the playoffs, but it's a tough road, and I'm not very optimistic. I am optimistic about our company, though. And our earnings, as Dennis mentioned, were in the upper half of our guidance range and benefited from customer growth in both natural gas and electric. We did receive the termination fee related to Hydro One. That's the big bump that was early in the year. And in 2019, our other businesses had strong earnings, primarily related to the sale of Metal FX and then net investment gains related to our non-regulated investment activity. With respect to capital expenditures, we remain committed to investing the necessary capital in our utility infrastructure. We expect Avista Utilities to have capital expenditures of about $405 million in 2020, and we expect AEL&P to be about $9 million. In our other businesses, we expect to continue to invest, and it's about $15 million for 2020. With respect to liquidity, we continue to have strong liquidity with $196 million available under our committed line of credit. And in 2019, we issued about $65 million in common stock, and we sold bonds in November of $180 million, and those bonds are due in 2049 for 30-year bonds. In 2020, we expect to issue approximately $160 million of long-term debt and $60 million of equity. In order to refinance, we have a $52 million maturity, long-term debt maturity, to fund our planned capital expenditures and maintain an appropriate capital structure. As Dennis mentioned, we are initiating our 2020 guidance for consolidated earnings to be in the range of $1.95 to $2.15 per diluted share. And this, again, guidance range assumes approval of our partial general rate case settlement by the Washington Commission. We experienced regulatory lag during 2019, and we do expect this to continue through 2021 due to our continued investment in infrastructure and the fact that we didn't file a rate case in 2018. In April, we filed general rate case in Washington, and we completed an electric-only rate case in Idaho with new rates effective December 1st. We also filed in Oregon in March, and those new rates are effective January 15th of this year, 2020, and we expect those cases to provide rate relief and start reducing the lag that we have been experiencing. Going forward, we will continue to try to reduce the regulatory timing lag and more closely align our returns with those authorized by 2022, and we continue to anticipate an annual earnings growth rate of 9% to 10% from 2020 to 2022, and again, we are basing that off of the midpoint of our original 2019 guidance. And then following 2022, we expect to have a 4% to 6% growth rate going forward beyond 2022. Our earnings growth rates, again, exclude the – they are based on the midpoint of the original 2019, but exclude the $1 related to the Hydro One transaction. These growth rates are – Really necessary, we have to have timely and appropriate rate relief in all of our jurisdictions. So our 2020 guidance range reflects unrecovered structural costs of about 90 basis points. That's consistent. And our guidance range for 2020 has improved our lag. It's now approximately 80 basis points. And the results in expected return for a VISTA of utilities of approximately 7.7% in 2020 for an ROE. For 2020, we expect the VISTA utilities to contribute in the range of $1.89 to $2.01. And the midpoint of our guidance does not include any benefit or expense under the IRM. Our current expectation for the IRM is a benefit within the 90% customer, 10% company sharing band, which is expected to add approximately $0.07 per share. We expect AEL&P to contribute between $0.08 and $0.12 per diluted share. Our outlook for Avista Utilities and AEL&P assume, among other variables, normal precipitation and normal hydroelectric generation for the year. We expect our other businesses to be between a loss of two cents to earnings of two cents per diluted share. Our guidance, again, only includes normal operating conditions and does not include any unusual items, such as settlement transactions or acquisitions or dispositions, until the effects are known. I'll now turn the call back over to John.

And now we would like to open the call for questions.

Very good. We can begin our Q&A now. If you have a question, please press star 1 on your phone. If you wish to be removed from the question queue, you may press the pound sign or the hash key. And if you're using a speakerphone, you may need to pick up the handset first before pressing start. the numbers. Once again, if you have a question, press star 1 on your phone. Our first question is from Richard Vuccarelli. I apologize, Richard, from Bank of America.

Hey, morning. No worries there. Congrats on the quarter of the year, guys. Just had a quick question on It looks like you increased the top end of the growth rate from 4% to 5% to 4% to 6% post-22. I was just curious, what's kind of driving the increased confidence there? Is it anything specific to the utilities?

Well, it's, you know, again, most of our earnings come from the utilities. So, really, it was just a, as we looked at our forecast going forward and believe. But, again, this is still, we need more. timely and fair rate relief in each of our jurisdictions. But as we looked at our forecast and our ability to have some customer growth and, you know, continued growth in our rate base, we believe that that, you know, that slight improvement in the top end was warranted. So we added that this quarter. And that's really for 23 and beyond.

Right, right. That makes a lot of sense. And just wanted to touch base on the other businesses. I guess historically there's been a bit of a drag there, and now you're pointing to a break-even at the midpoint of the guidance. What's kind of the driving factor there, and is that expected to continue to improve throughout the outlook?

Well, the driving factor for this – for 2019, we had the sale of metal effects, and then we had some earnings from our other investments that – We do expect, as we continue to invest in these other businesses, we do expect them to generate earnings and income. We haven't really given forward guidance beyond this year, but as we continue, you've seen the improvement to get to, as you mentioned, Richie, the midpoint is a break-even. We would expect, as we get out over the next three to five years, it would be in a nickel to $0.10 a share increase. if we continue to invest at the levels that we've been investing. And the performance of those investments continues to be what we expect. That can always change, but we do expect it to start generating positive earnings for us as we go forward.

Got it. Thanks a lot. That's very helpful. That's all I have. Okay. Thank you.

Our next question is from Brian Russo of Sudoti.

Yeah. Hi. Good morning.

Morning, Brian. Good morning.

With the upcoming Washington rate case filing that you are targeting for second quarter or third quarter, when would new rates go into effect in 2021? Is it still that April 1st, or will that be pushed out given the later than usual filing?

Brian, Washington is an 11-month process, and historically they have used the entire 11 months. So it would be 11 months from when we filed.

Okay, got it. And then can we just assume, you know, it looked like the year two revenue request that was not settled on totaled about 23 to 24 million. Is that kind of a good kind of benchmark as to what revenue increase you might file in this upcoming rate case? And then what is – what will be the new – historical test year?

I think the best way to get a benchmark is to look at what we file. We have to reevaluate every time what we're going to file for. So, you know, in the second or third quarter in Washington, in the first quarter here in Oregon, and then second half of the year in Idaho, you know, we are constantly evaluating where we are with our capital deployment and our expenses, and then we file our case. So if that's when you're going to have the best. I wouldn't use a prior year or second year as what you think it's going to be. And, Brian, I apologize. I forgot the second half of your question. Oh, the test year. Yeah, the test year will be the, you know, at least 2019, if we file later in the year, we might move that forward a quarter or two, depending on when we file.

Okay, got it. And the AMI deferral that is mentioned in the 10-K, will that be included for recovery in this upcoming rate case?

Ryan, this is Kevin Christie. We're still analyzing the case, and at this point in time, we can't say for sure that that will be true. It will either be this case or the next, though.

Okay, and then lastly on the rate case, what would be the optimal capitalization for that you look to file for? I think the last case was 47 to 48% equity. And how does that compare with where you ended at year end 2019 at close to 54% debt?

Well, again, that's the consolidated cash structure as you're looking at. When we look at our regulated jurisdictional cash structure, we... are very close. We may not be exactly on, but we're very close at all times. That's why we issue the equity the way we do it, to maintain that capital structure on a jurisdictional basis. And 48.5% in Washington is where we currently are, again, assuming that the settlement gets approved by the commission.

Okay. And then, thank you. And then on the remand, the potential refund, in the case also, you know, the such a wide range of 3.6 million, which is what you guys took a charge for in 19, but the top end is 77 million. And I'm just trying to get a sense for, what are the scenarios there and how might that change your equity needs relative to any outcome there?

Well, I mean, yes, it is a wide range and that's because the parties have very diverse beliefs on what each of the issues in that case. When the commission decides is when we're going to look at, you know, they could decide in our favor, they could decide in the other party's favor or somewhere in between. We don't know. We'll have to evaluate that and we'll have to look at is their decision reasonable, you know, and then evaluate what our options are with respect to that. That's when we would also look at what are our equity needs because it would be a one-time, we believe it would be a one-time and then the commission would determine how that gets returned to customers if they selected a number that's different than what we've recorded.

Okay, great.

And then – Based on whatever that number is.

Okay, understood. And then on the guidance for 2020, obviously the midpoint is a zero-earned balance, but you're forecasting to be in the 90-10 range. You know, is that driven by low gas prices and or can you comment on, you know, the current outlook for hydro conditions?

Well, so that's determined based on the amount of power supply costs that are embedded in our rates in Washington and then our forecast of what do we expect our power supply costs to be. So, yes, it's a combination of, You know, we do expect normal hydro right now where we are. It's about 100% in our different basins. But recognize we're still early, right? That's where the snowpack is, but it depends how it comes off with the melt. And where we are right now is about 100% in our expectation. So it is primarily a little bit lower gas prices and then some, you know, slightly favorable hydro conditions.

Brian, you're breaking up a little bit.

I hope you have one speaker.

No, I'm on the headset. Can you hear me now?

A little better.

Yeah, just on the guidance, the original midpoint of the 2019 guidance, what was that?

$1.87 was the midpoint. It was $1.77 to $1.97. That's excluding, I'm sorry, $2. You've got to take out the Hydro One. So excluding the Hydro One termination fee, it was $1.77 to $1.97, $1.87 being the midpoint.

Okay, great. And your decision to participate in the EIM, any more further color or outlook on how that might change, you know, your integrated resource planning and PPA roll-offs, I think, in the mid-20s?

Yeah, this is Dennis. You know, as I mentioned, we're hard at work internally, and we plan to join the EIM in the first part of 2020. So really, or excuse me, 2022, yeah. You know, having access to that market will allow us to better integrate the renewables industry both our existing and the future renewables we would expect to add on to our system as we move forward to meet our clean electricity goals. And as I mentioned, it helps us spread costs over that larger area. So we're on track. If you're familiar with that market, most of the larger players in the West are either members or are, like us, in the process of joining So we think that that will only enhance our ability to manage our system and manage our costs and integrate the new renewables that will come online. We'll be filing our latest IRP actually later this week, I believe, in Idaho. So that will be available on our website, and you'll be able to see, you know, what our plans are moving forward, both in the short and long term to meet our goals going forward.

Okay, and then just lastly, if there were a paper or policy statement issued by the Washington Commission on CETL legislation, any comments on that?

Well, we think it's a constructive policy statement. Obviously, all the utilities are still digesting how that helps us going forward, but our early read indicates that the Commission is giving us an opportunity to to have multi-year rate plans and a mechanism to work through how that could work. The devil's in the details, but we're optimistic at this point.

Okay, great. Thank you very much.

Thanks, Brian.

Our next question from Chris Ellinghouse of Cyberg Williams.

Hey, guys. How are you? Morning, Chris. Mark, you talked a little bit about the improvement you're expecting in the investment, other income. Can you give us any color on what's moving that today and sort of that $0.05 to $0.10 goal over what sort of time frame are you looking for that? Three to five years.

And, again, we continue to make some investments, you know, I believe, prudent investments. And with those investments, we expect to have some income with that. So we do expect some income growth over the next three to five years, growing to a five to ten cent amount per share as we get out, you know, again, three to five years towards the end of that period. And, you know, all the specific investments we just, we were in, Energy Impact Partners Fund number one, we just joined Fund number two. Those were both $25 million commitments. And we started to see through Fund 1 some earnings come out of that. We expect that to continue with Fund 2, and we believe that that will be the case. And we're making other investments in the university district and in innovation that we believe will get us those numbers. I'm not giving you specifics because I don't have the specifics. But, again, we believe we'll continue to invest, and we will make some money at that and start to have some slight improvement in our earnings overall.

Okay. Can you give us any color on general timing of when you expect to make your filings this year?

For the rate cases?

Yeah.

Well, we said first quarter for Oregon, second to third quarter for Washington, and second half of the year for Idaho. That's about as specific as we can get. We're analyzing all the details and looking at possibilities of multi-year plans and how the policy statement affects it in Washington. So we want to make sure that And also, once we get, as is our practice, once we get rate cases adjudicated by each jurisdiction, then we try to take that time when we're not in a rate case to go over and meet with our commissioners individually and with their policy staff to talk about our plans and make sure that we have an ability to discuss what we're thinking with the commissions before we file. So until all that happens... We don't have the details of exactly when we will file.

Yeah, sorry, I must have missed that part. As far as the equity goes for the year, obviously you've got a good uncertainty in terms of what the remand might do. Are you planning to be sort of using the ATM on a more consistent basis, or do you want to wait and see what that remand number might do?

Well, again, we expect that the commission will have their order on our general rate case for rates to go into effect by April 1st. So we think around there they may try, the commission may, we have no insight in that, may try to get all of these orders, we have a couple of them out there, together at the same time so we just have one change to our customer bills. And if that is the case, we will wait. We'll find out what that you know, what that is, and then we'll go forward. But even if we don't get that, if they waited because they have more pondering to do, we'll begin, you know, we do need our equity, we'll begin to use that ATM. And if we get a number that's significant and causes us to have additional equities, we'll tell you at the time.

Okay. Can we assume that your guidance and your equity expectation is based on your proposal on the remand number?

It's just based on our number, the 3.6 that we already booked in 19. We have not assumed anything going forward that they come out. We don't really have an ability to make any other assumption.

Okay. I haven't seen it in the 10K yet, but what's the delta on middle FX from 19 to 20 for operating earnings?

Metal FX is not in 20. There was a gain in 19 of, I want to say, 4 cents is an estimate. I might be off slightly there. But that was a gain. That wasn't their operating earnings. And they're not included in our guidance for 20. The earnings prior to the sale, what was that level in 19? You know, it was about a penny a year, if I recall. I mean, I'd have to go back. That's... I know I'm close. I may not be exact, but it wasn't significant earnings. It was about a million dollars a year. They were positive earnings, which is a good thing.

And going back to the investment other income, is that five to ten cents based on just the first two energy impact partners or investments?

No, it's all of our investment, Chris, as we go forward. We're going to continue to invest in the next three to five years. and we expect to get some earnings out of that. We're not just making the investments and not make money.

No, I understand. I just want to make sure that includes incremental investments over that five-year period as well. It does. Okay. At roughly that $15 million kind of number?

Somewhere $15 to $20 million, yes.

Okay. Thanks for the call. I appreciate it. Mm-hmm.

Good morning.

Good morning, Vidula. I just want to double check. I think you indicated that the 2020 guide is, you know, still has 80 basis points of lag that's outside the structural lag you always have. Can you, one, did I hear that correctly? Is the structural lag 90 basis points, as I recall?

Yes and yes.

Okay. I think I'm good. Thank you very much. Thanks for doing it.

On this question, Phil Covello of Exodus Point.

Good morning, guys. Hi, Phil. Hey, yeah, Chris and Brian actually answered my questions already. Pretty exhausted, so I'll step out of the queue. Thanks. Thank you.

And a question from Brian Russo again.

Yeah, thanks for the follow-up. Just real quickly, can you remind us what your dividend policy is?

Well, we try to stay in the 65% to 75%. range of earnings. As our earnings grow back into, we're slightly high at this point, but we expect as we grow back into with the 9% to 10% to be in that range as we get forward. And we tend to grow our dividend in that 4% to 5% range we have historically. So we just, as Dennis mentioned, we just grew our dividend about 4.5% this year to get to $1.62. Got it.

Okay. Thank you very much.

Thanks, Brian.

Once again, if you have a question, please press star 1. And, John, it looks like there's no more questions.

Okay. I want 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 our conference. Thank you for participating. You may now disconnect.