Avista Corporation

Good morning.

My name is Cree, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Avista Corporation Q1 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mr. John Wilcox, so you may begin.

Thank you. Good morning, everyone, and welcome to Avista's first quarter 2021 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 2020 and our 10-Q for the first quarter of 2021, 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 first quarter of 2021 were 98 cents per diluted share, compared to 72 cents for the first quarter of 2020. Now I'll turn the discussion over to Dennis.

Well, thanks, John, and good morning, everyone. I'd like to begin my remarks this morning by acknowledging that after managing through the impacts of COVID-19 for more than a year now, We're encouraged to see some light at the end of the tunnel as more people are vaccinated against the virus and the economy shows signs of recovery. Yet we know it could still be a while before we're able to return to the office or settle into any type of new normal. In the meantime, we'll continue to provide care and compassion for those who are struggling to make ends meet through energy assistance programs, through payment arrangements, and even COVID-19 debt relief grants. I am extremely proud of our employees. Despite these unique times, they have adapted easily and continue to move our business forward on all fronts. The quarterly results we're sharing with you today demonstrate their drive and determination to get the job done. Recently, we've taken steps to move us toward a clean energy future. A few weeks ago, we announced our aspirational goal to reduce our carbon emissions for natural gas by setting new natural gas goal of being carbon neutral by 2045, with a near-term goal of reducing greenhouse gas emissions by 30% by 2030. Our strategy to achieve lower emissions includes investing in new technologies like renewable gas, RNG, which is RNG, hydrogen, or other renewable biofuels, We're evaluating how to best integrate RNG into our gas supply portfolio and researching hydrogen as another renewable fuel. We'll also focus on reducing consumption through conservation and energy efficiency and improving our infrastructure. We realize this is a heavy lift. There are several critical pieces that will need to fall into place in the coming years. Technology costs must come down. New innovations need to occur. and regulatory support will be necessary for us to achieve these goals. As we identify our strategies, keeping costs affordable will be a priority. We're committed to executing on this goal in ways that support affordability and reliability for our customers. Our natural gas goal demonstrates that our vision of a clean energy future encompasses both electric and natural gas resources, and that we are dedicated to reducing greenhouse gases from the energy we deliver to our customers. We're also moving the dial towards achieving our clean electricity goal of providing customers with carbon neutral electricity by the end of of 2027 and carbon free electricity by 2045. Last month we entered into a contract with the Chelan County Public Utility District that will add more renewable hydropower to our electric generation portfolio. The contract delivers on the strategies included in the 2021 electric integrated resource plan that we filed recently. and also supports the goals of Washington State's Clean Energy Transformation Act, or CEDA. In regards to our quarterly results, we're off to a good start in 2021, and we are on track to meet our earnings targets for the full year. Avista Utilities' earnings were better than expected, while AEL&T's earnings met expectations for the first quarter, and our other businesses exceeded our expectations. In regulatory matters, we're pleased to share just two days ago, on Monday afternoon, Washington Governor Jay Inslee signed into law Senate Bill 5295. That new law will help transform the regulation of electric and natural gas companies towards multi-year rate plans and take the first steps towards performance-based rate making. The benefits we see with the passage of this important legislation is a requirement to file multiyear rate plans from two to four years in length, with the foundation of the rate plan being set using methodologies the Commission may use to minimize regulatory lag. Ultimately, it will require current and future Commissioners to implement the change, but we feel this is an important first step towards progressing the regulatory model in the State of Washington. Meanwhile, here's an update on our regulatory filings. In January, as you know, we filed two-year general rate cases in Idaho, one for electric, one for gas. And in 2020, we filed general rate cases in Washington, again, one for electric and gas. We continue to work through the regulatory process in these jurisdictions. In Oregon, we expect to file a rate case in the second half of 2021. We reached a significant milestone in our focus on electric transportation when the Washington Utilities and Transportation Commission approved three tariffs that allow us to proceed with several programs outlined in our transportation electrification plan. Among other things, the UTC's approval allows us to establish both an optional general service and large commercial electric vehicle race, which will help us enable and accelerate fleet electrification for commercial customers such as the Spokane Transit Authority. Our transportation electrification plan and newly approved tariffs will serve as a valuable model for others, and it's a great example of our industry's role in electric transportation and our clean energy future. Once again, Avista is leading the way. Looking ahead, we remain focused on running the great utility and continue to invest prudent capital to maintain and update our infrastructure and provide reliable energy service to our customers. We are confirming our 2021 through 2023 earnings guidance. And with that, I'll turn this presentation over to Mark.

Thanks, Dennis, and good morning, everyone. So last night, my Blackhawks were eliminated from the playoffs. So we have five more games left, but we have no chance for postseason play this year. So that's a sad day for me. But on a happy note, we had a great first quarter. The Vista Utilities contributed $0.92 per diluted share compared to $0.68 last year. And compared to the prior year, our earnings benefited from higher utility margin, and we had general rate increases and customer growth. The first quarter also included an accrual. The first quarter of the prior year had some negative accruals in it related to the Washington remand case, the 2015 case, and disallowances around Coal Strip and an accrual for the Coal Strip Community Fund. That all happened in 2020. That were drags on 2020 earnings. The IRM in Washington was a pre-tax benefit of $4.3 million in the first quarter compared to $5.2 million in the first quarter of 2020. 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 $415 million in 2021. With respect to liquidity, on April 5th of 2021, we repaid the outstanding balance of our one-year credit agreement that we entered into in April of 2020, and that was to remind you to make sure we had sufficient liquidity at the start of the pandemic. On April 30th, we had $182 million of available liquidity under our $400 million line of credit and we expect to extend that line of credit into a multi-year deal in the second quarter. We expect to issue approximately $120 million of long-term debt in 2021 and $75 million of equity. As Dennis mentioned earlier, we are confirming our 2021 2022 and 2023 earnings guidance with consolidated ranges of $1.96 to $2.16 per diluted share in 21, $2.18 to $2.38 in 2022, and $2.42 to $2.62 in 2023. And this puts us on track to earning our allowed return by 2023. Our guidance does assume timely and appropriate rate relief in all of our jurisdictions. Our 21 earnings guidance reflects, again, unrecovered structural costs estimated to reduce our return on equity by approximately 70 basis points. And in addition, our 21 guidance reflects a regulatory timing lag estimated to reduce our equity return by approximately 100 basis points. This results in a return on equity for Avista Utilities of approximately 7.7% in 2021. We are currently forecasting customer growth of about 1% annually for Avista Utilities. For 2021, Avista Utilities is expected to contribute in the range of $1.93 to $2.07 per diluted share, with the midpoint of our guidance range not including any expense or benefit under the energy recovery mechanism. Our current expectation is to be in the 75% range customer 25% company sharing band, which is expected to add approximately $0.06 per diluted share. For 2021, we expect AAL&P to contribute in the range of $0.08 to $0.11 per diluted share, and our outlook for both Avista Utilities and AAL&P assumes, among other variables, normal precipitation and slightly below normal, about 92% for Avista Utilities, hydroelectric generation for the year. For 2021, we expect our other businesses to be between a loss of 5 cents to 2 cents per diluted share. Our guidance generally includes only normal operating conditions and does not include any unusual or non-recurring items until the effects of such items are known and measurable. I'll now turn the call back over to John.

And now we would like to open up this call for questions.

If you would like to ask a question, please press star, then the number one on your telephone keypad. Again, that's star, then the number one on your telephone keypad. We'll pause for just a moment to compare between your roster. Your first question comes from the lineup, Cody Clark with Bank of America.

Hey, good morning, everyone. Thank you for taking my question. Good morning. Good morning. Good morning. So maybe first on the RNG side, I know it's early, but I'm wondering if you're planning on any unregulated investment in production or otherwise. Are you just thinking about it in terms of integrating it into your distribution system? And maybe there's some incremental catbacks on interconnection with the facilities, but just wondering how you're thinking about this at this point.

Yeah, Cody, this is Dennis. At this point in time, it's the latter. So we're looking at it as a utility resource that would be integrated into our system to meet our utility loads.

Got it. Okay. And then maybe just higher level, if you could share your thoughts on the puts and takes of potentially exiting coal strip, removing it from rate base and replacing it with PPAs that earn a whack return under CETA. I'm kind of wondering how this plays into your post-2023 growth outlook.

Well, with Coal Strip, you know, it's clear when you look at our integrated resource plan recently filed, and we've been stating all along that it will need to exit our portfolio at the end of 25. So we recently issued an RFP for new resources in that as a result of that process, the Chelan County PUD contract that I referenced earlier was selected. We will continue to meet our needs going forward. You know, through a competitive process, we need to, you know, any self-built options we would have, we would have to stack up with an RFP, what might be available in the marketplace. And, of course, the end obligation and desire here is to get the most cost-effective resources for our customers to serve their needs going forward.

Does that help? Okay, I got it. Yeah, yeah, understood there, understood there. That's all I had. Thanks again for your time. Thanks, Cody.

Okay, next question comes from Sophie Klopp with KeyBank.

Hi, good morning, guys. How are you?

Good, Sophie.

Hey, I was wondering if you could comment maybe on the Montana lawsuit related to Coal Strip that is being reported sort of – any color you can offer on the positions of the parties and what you think will transpire with respect to the bill that they passed and this proceeding?

Well, this is Dennis. It's hard to know what will transpire at this point. As we've talked before, there are six owners in the plant. We've all been working in good faith to try to find a solution that meets the needs of of all parties, including the parties in Montana. And it's just a very complex situation. It's unfortunate that the bills in question, Senate Bill 265 and 266, were signed into law. It complicates matters. It adds complication to an already complicated situation. And we were just in a position where we need to protect our rights under the current agreement. So those are in process, and it really is at this point in time, Sophie, impossible to know how those will play out, but we will keep you updated as we go forward.

Thank you. That's all I had.

Thanks, Sophie.

At this time, there are no questions.

Okay. I guess we will conclude the call. I want to thank everyone for joining us today. We certainly appreciate your interest in our company. Have a great day.

This concludes today's conference. You may now disconnect.