Avista Corporation

Good day. Thank you for standing by, and welcome to the Avista Corporation Q2 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today. John Wilcox, thank you. Please go ahead.

Good morning, everyone, and welcome to Avista's second 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 Crasselt. I would like to remind everyone that some of the statements that we 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 10Q for the second 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 second quarter of 2021 were 20 cents per diluted share, compared to 26 cents for the second quarter of 2020. For the year to date, consolidated earnings were $1.18 per diluted share for 2021, compared to 98 cents last year. Now I'll turn the discussion over to Dennis.

Well, thanks John and good morning everyone. I hope your summer is going well and that you're staying safe. On June 30th, Washington state officially listed most of the remaining restrictions that have been in place during the pandemic. We're excited to see our local economies continue to recover. We're experiencing increased loads and customer growth is steady. Like many other businesses, we continue to monitor the pandemic very closely and watch what's happening with variants and case count in our communities. We're ready and able to successfully adjust our business as needed and also continue to provide care and compassion for those who are struggling. Now let's look at some highlights from our second quarter. We had a challenging second quarter. which included an unprecedented heat wave that brought with it several consecutive days of triple-digit, record-breaking temperatures across the region. On June 29th, Spokane temperatures soared to 109 degrees, setting a new record high temperature, and it was even higher in many of our neighborhoods. That same day, Avista experienced a major increase in customer usage, which resulted in the highest energy usage in our company's 132 units. 132-year history. The intense temperatures combined with record high usage strained parts of our electrical system and caused some of the equipment that runs our electric grid to overheat. Six of our 140 distribution substations were impacted. To prevent the equipment from overloading and to avoid extensive and costly damage to our electric system, we implemented protective outages for customers served by the equipment that was most impacted by the heat. Over the course of the event, we were able to reduce the impact to customers through system modifications. We appreciate our customers' patience for those who experienced outages. Higher customer loads related to the extended heat wave were the primary driver for an increase in net power supply costs to serve our customers. which negatively affected the energy recovery mechanism, or ERM. Overall, we've experienced hotter and drier than normal weather across the Pacific Northwest, which contributed to lower than normal hydroelectric generation and increased power prices. For these reasons, we had to rely on thermal generation and purchased power at higher prices to serve those additional loads. As a result, Abyss Utilities' earnings were below expectations for the second quarter. AEL&P's earnings met expectations for the second quarter, and they are on track to meet the full-year guidance. It was a strong quarter for our other businesses, which exceeded expectations due to gains on our investments and the sale of certain subsidiary assets associated with Spokane STEAM plans. Wildfire resiliency continues to be a focus for Avista. Our region has experienced extremely dry conditions all spring and summer, and combined with high temperatures, wildfire risk is high. In response to these conditions, Avista has been operating in what we call dryland mode since late June, and dryland mode decreases the potential for wildfires that could occur when re-energizing a power line. Under normal conditions, these lines located in rural and or forested areas are generally re-energized automatically. However, during the current dry weather conditions, Avista's line personnel physically patrol an outage area before a line is placed back into service. This can require more time to restore service, but it decreases a potential fire danger. This practice is in line with Avista's wildfire resiliency plan. which was released last year, building on prevention and response strategies that have been in place for many years. VISTA has committed to a comprehensive 10-year wildfire resiliency plan that includes improved defense strategies and operating practices for a more resilient system. In regards to regulatory matters, we are pleased to have reached an all-party settlement in our Idaho general rate case, The new rates are fair and reasonable for our customers, the company, and our shareholders, and will allow Avista to continue receiving a fair return in Idaho. Our Washington general rate cases continue to work their way through the regulatory process. Our hearings have been held and we expect a decision by the end of September. In Oregon, we expect to file a rate case in the fourth quarter of 2021. We are confirming our 2021 earnings guidance with a consolidated range of $1.96 to $2.16 per diluted share. While we are confirming our consolidated range, we are adjusting our 2021 segment ranges to lower Avista utilities by 10 cents per diluted share and raise other by 10 cents per diluted share. For 2022, we are lowering consolidated earnings guidance by 15 cents per diluted share to a range of $2.03 to $2.23 per diluted share. For 2023, we are confirming our earnings guidance with a consolidated range of $2.42 to $2.62 per diluted share. Although we expect to experience headwinds in 2022 from regulatory lag, we are confident that we can meet our earnings guidance for 2023 and earn our allowed return. Looking ahead, we'll continue focusing on our utility operations while prudently investing in the necessary capital to maintain and update our infrastructure to provide safe, reliable, and affordable energy to our customers and our communities. Now, I'll turn this presentation over to Mark.

Thank you Dennis and good morning everybody. I know everybody's sitting on the edge of their sheet waiting for the Blackhawks next acquisition, which is a Spokane native. We got Tyler Johnson, a two time Stanley Cup champion who is a Spokane native, so we're pretty excited about that. There's your Hawks update. As Dennis mentioned, we're confirming our 2021 earnings guidance, lowering our utility guidance for 21 and also 22 and confirming 23 consolidated guidance. Our guidance, I will spend a little time on that. Our guidance assume among other things, timely and appropriately rate relief in our jurisdictions. That's very important as we need. Dennis mentioned, we settled our Idaho case. We're still awaiting approval from the commissions, which we expect before those rates go into effect September 1st. For 2021, we expect the VISTA utilities to contribute in the range of $1.83 to $1.97 per diluted share. And the lowering of our guidance in 21 and 22 for the Avista utilities is primarily due to increased regulatory lag. That's due to increased capital expenditures, primarily due to growth, and higher than expected depreciation expense. But that is, we believe, all timing. And as we begin to plan for our next Washington general rate case to be filed early in the first quarter of 22, we expect that to be a multi-year rate plan as required under the new law. We will seek to include all capital investment through the end of the rate plan period in rates in an effort to earn our allowed return by 2023. In addition, we've experienced an increase, as Dennis mentioned, in actual and forecasted net power supply costs. Although the midpoint of our guidance range does not include any benefit or expense under the IRM in Washington, the increase in power supply costs has reduced the opportunity for us to be in the upper half of the guidance range. And our current expectation for the IRM is a surcharge position within the 90-10 company sharing band, which is expected to decrease earnings by $0.08 per diluted share. Recall, last quarter, our estimate for the IRM for the year was in a benefit position, which was expected to add $0.06 per diluted share. In addition, we are also absorbing more net power supply costs under the PCA in Idaho. For 2021, as Dennis mentioned, we expect AALP to contribute eight to 11 cents. And we increased the range in our other businesses by 10 cents, which really offsets the utility reduction. And that's largely due to a range of five to eight cents of diluted share because of investment gains and the gain we experienced from the sale of Spokane's steam plant. Our guidance generally includes only normal operating conditions and does not include unusual or non-recurring items until the effects are known and certain. Moving on to earnings for the second quarter, the VISTA utilities contributed 11 cents per diluted share compared to 26 cents in 2020. Compared to the prior year, our earnings decreased due to an increase in net power supply costs, as Dennis mentioned, mainly due to higher customer loads from the heat wave, and we had lower than normal hydroelectric generation because of the hot and dry conditions. Our hydroelectric generation is about 91% of our expectations are normal for this year. The IRM in Washington also moved significantly, had a pre-tax expense of $7.6 million in the second quarter of 21 compared to a pre-tax benefit of $0.4 million in 2020. Year-to-date, we've recognized $3.3 million of expense in 21 compared to $5.6 million in benefit in 2020. In addition to the higher power supply costs, we also had higher operating expenses in the quarter, mainly due to the timing of maintenance projects, as many of those maintenance projects were delayed in 2020 because of COVID-19, whereas in 2021, we returned to our original schedules and performed that maintenance in the second quarter. The higher maintenance costs were partially offset by lower bad debts expense, as we were continuing to defer bad debt through our COVID-19 regulatory deferrals. Moving on to capital, as Dennis mentioned, we're committed to continuing to invest the necessary capital in our utility infrastructure. We currently expect the Vista utilities to have increased capital expenditures up to $450 million in 2021 and $415 million in 2022, or $445 million in 2022 and 2023. That's a $35 and $40 million increase in 21, 22, and 23, $40 million and 23 as well. And this is really to support continued customer growth. Our customer growth is about 1.5%, which is up from 0.5% to 1% in prior expectations. We expect to issue approximately $140 million of long-term debt and $90 million of common stock including $16 million that we've already issued through June on the common stock side in 2021. The increase in long-term debt in common stock is to fund the increased capital expenditures. I'll now turn the call back over to John. Thank you.

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

If you would like to ask a question at this time, simply press star, then the number one on your telephone keypad. We will pause for just a moment to compile the Q&A roster. And your first question comes from the line of Julian DeMullen Smith of Bank of America.

Hey, how's it going, everyone? It's actually Cody Clark on for Julian.

Morning, Cody. Hi, Cody.

So a couple of questions here. I guess first, on the guidance reduction in 22, I'm wondering if there's anything else that's driving that outside of just greater regulatory lag and power supply costs. It seems like those factors wouldn't drive that much of a delta. Are you making any assumptions on the Washington rate case that's contributing to that dynamic, or are you seeing any increased insurance costs just on the wildfire side?

There's some other nominal costs. We really highlighted the big drivers. There are some other nominal costs on O&M, but it really is, and power supply, but it's really largely depreciation and lag. Some of it is in some of our capital as well, as we deploy capital. It's been in shorter-lived assets that didn't get moved to the case. So we expect, we still expect a fair outcome in our existing case, but realize as we move forward with how we've spent our capital and the type of capital we're seeing is that'll really get pushed into the next case, which we expect to file, like we said, in early 2022. early in the first quarter. And so, no, that has nothing to do with, we continue to expect a fair outcome in our current Washington case.

Right.

And it is largely additional capital due to growth and depreciation. There's some other small things. That's the main driver.

Got it. And then just on 23 guidance, I guess, all else equal, you know, you're investing more in 21 and 22, and then you're going to follow that case and in early 22 but you you kind of reaffirmed that guidance range for 23 and also stated that you're you're still assuming that you're going to get to your authorized in 23. so i'm i'm just kind of wondering what's contributing to to your reaffirmation of that 23 guidance range i guess you know from my perspective it should be a little bit higher

Well, it wasn't a significant move. The capital assets over long lives have some impact, but it's not a significant impact. So we're still within the range. So rather than have the nuance of moving it a few cents, we just maintained our range. We expect a confidence. We want to have the confidence that we expect to get back to earning our allowed return on the capital that we deploy. That will be within that range. The capital move wasn't significant enough to move it. It is improvement, and that's a positive, but it wasn't enough to move our range for 23.

Got it. Okay. Okay, I'll pass it off and jump back in the queue. Thanks.

Thanks, Cody.

And your next question comes from the line of Sophie Karp from KeyBank.

Hi, good morning. Thanks for taking my question.

Hi, Sophie.

Hi, Sophie. Hey, so maybe to build on the previous question a little bit here. So you're talking about an increase in lake outer lag that's partially due to higher capex, I suppose, in 2022. Are you correspondingly increasing your capex outlook? Maybe I'm missing this here somewhere.

So are you asking? We are increasing our capex outlook. Is that your question? And that is impacting our... Yeah, yeah. Yes, we are increasing our CapEx outlook. So we're going to go to 450 for this year and 445 and 445 for 22 and 23. That compares to 415 previously and 405 and 405. So it is a $35 million, $40 million, and $40 million increase. And it's largely due to growth and the cost of really doing the same projects that we have and just the cost of doing those projects as materials have gone up. We believe those projects are very important for our customers. And actually, the growth is good as well for the company. So that's really, it's not a fundamental, we don't have any new power plants in there or any other major projects we've added. It's just incremental capital to continue to do what we need to do for our system.

Got it. So, okay. That's a very helpful color. And so then, could you maybe give us a little bit more color on the guidance revision on the other segments this year for 2021? So if that goes from negative 5 to 2 to positive 5 to 8, it can have a little bit more power on what accounts, so that would be hugely helpful.

It was really largely driven by the second. I mean, the second quarter, we had strong earnings in the second quarter, and it was due to investment gains in the funds that were in with the energy impact partners and also the sale of steel plant. We had a small gain on the sale of steel plant square as well. So that's really hooked into our actual results. and then we just look at that forward. We're not expecting more significant gains if that's really based on the actual results we had in the quarter.

Yeah, do you disclose what you have on those funds? Is it kind of similar to energy venture portfolios that some of your peers have?

I don't know what the peers are invested in particularly, but no, we don't disclose what the particular investments of the fund are, just that we have invested in Fund 1 and Fund 2, and we committed $25 million to each fund, and we are investing in those funds, you know, continuously. So we don't – but we expect to invest about $15 million in our other businesses in 21 and I believe also in 22. Yes.

Got it. Got it. Okay. And then before I pass it on, maybe on the power supply situation so we clearly understand the hydro was an issue. How do you think this is going to stack up in the second half? Is hydro kind of becoming less of a factor in the second half? Maybe if you can give us some color on that and also remind us how the PSA mechanism kicks in here.

So when we do our estimates for, and we said, excuse me, we said $0.08 negative surcharge position, that is for the year. So that does include our expectations for the year of what hydro will be. Now, what we do assume is normal hydro. In the summer months and in the fall, we don't expect much rain typically, but in the winter we do. So, you know, we do expect normal hydro conditions for the rest of, you know, the rest of the fall and into the winter. So that could have some variability, but most of the variability typically, again, occurs in runoff. And that's why we were also down because we got such heat early that it used all the water. And so our hydro is down, like I mentioned, we're 91% for the year. It's about 50 average megawatts for the year is what the impact is. And so could we have continued adjustments going forward? Yes, but we incorporate current conditions into our forecast. So it would have to vary from the current conditions.

Got it. And so your ability to recover those costs is basically limited by the rate. structure there, correct?

Well, it's what our power supply cost is. So if the cost of natural gas in our loads and our hydro changes, that would change. But we're in the 90-10 right now. So that's where, if it gets worse, we only have a 10% impact. It does impact the customers that 90%. Thank you. Thank you, Sophie.

Your next question comes from the line of Vidula Murthy from Hudson Bay Capital.

Good morning.

Good morning, Vidula. How are you?

I am okay. A couple of things. I guess one, in terms of 2022, you've indicated about depreciation regulatory, but you also referenced power costs. So is there like an arm negative that you're incorporating for 2022 that we ought to be aware of?

Well, the power costs actually reset in our rate cases. So when we come out and give 22 guidance, we will put that expectation in. But our power costs will reset in our rate case, which in Washington, which we expect to be effective October 1st. Again, we still need commission approval and all that in order, but we expect that to be effective October 1st. And in that case, we expect to reset power supply costs And then we will have a forward look on what impact that could have in our 22 expectations.

So that should be fair to say then that the revision downward for 2022 really is not tied to cost at all. It's more tied to, you know, increased capex and plant and service that's not yet reflected in rates, that type of thing.

Correct. There's some minor impacts to cost, but minor. It's really depreciation in capital.

Okay. In terms of equity, you're up to $90,000. I hear you've done, was it $1,616 such that there's like $74,000 left to do? Correct. Okay. Now, given the elevated capital going forward, is $90,000 now a better level on an annual basis? If I recall properly, we're at $50,000. on an annual basis kind of, you know, every year going forward? Is it down 90s in the number?

We've been in the 50 to 75 million on average over the past several years. I don't remember the exact numbers. And so it'll depend on the cash flows that we have because it's also operating cash flows help offset our needs for equity. But, you know, we'll be in our normal ranges adjusted for the additional capex. So if you just assumed You know, a good assumption would probably be if you assume 50-50 on the additional $40 million, $45 million, $40 million going forward, it's an additional $20 million to our historical levels. So, you know, I don't know that we necessarily get to 90, but we could. We'll have to look at that, and we issue that guidance when we come out in future years.

Okay, because I guess you would still be kind of like in a range where, needing to do any type of a block or public type of thing as opposed to your various stock plans and ATM type of program, that still looks to be sufficient?

Absolutely. The current ATM program that we have with four banks would be sufficient to cover any of our equity needs, we believe. That doesn't mean we don't have the opportunity to do a block under that agreement, but typically we do it under that program.

Okay. And as I've recalled, you know, in the past when, you know, the discussions come up about increasing TAPEX and dealing with, you know, just system issues, my recollection is that the $400 million level approximately kind of triangulated with what you felt was an appropriate level of increase in cost to customers that balanced things out. Now, I'm wondering with increased CapEx here, whether to the extent that, you know, that there might be that there's pressure there because that's a little counter to what I recall previous discussions over the last, say, 18, 24 months.

Well, we've been at the $405 million level for many years. I don't know if it's eight or nine years. I don't remember the exact year we went up. But we've been at that level for a long time. So, um, you know, given that we looked at it and said, we have more, we just came out as Dennis mentioned with our new wildfire resiliency plan that added some, some capital we need to spend over the next 10 years in that plan. And we have our, you know, we had our plan consistently for a long time. So we decided and growth capital has gone up as we continue to add customers and we're joining the energy and balance market as well. So there's a number of different needs outside of our regular capital need that we felt now was the time to continue to manage that and increase it slightly. Again, it's about a 10% increase that we felt was prudent while still understanding that, you know, we do have to manage and work through the cost pressures and affordability to our customers. So we didn't, you know, we've identified that if you look at our regulatory filings, over $500 million of projects we could spend money on every year. And as we have these new things added to that, We still try to maintain our capital at a prudent level, but felt now was the time to move up to the 445 in the next few years.

And with the 1Q22 rate filing, can you talk a little bit about the multi-year abilities and some of the other facets that legislation provided you and how you are thinking about using those to be able to collapse the regulatory lag for 2023 and be able to earn whatever return it is?

You bet. This is Kevin Christie. Nice to chat with you here. I wanted to describe that a little bit for you. We have, starting with 2022, the requirement to file a multi-year rate plan. It can be as few as two years and as many as four years. And in that legislation that moved forward the ability to have the multi-year or the requirement to have the multi-year rate plan, it sets a process or the ability to get the first year right. That's, of course, my words, not how it reads exactly in the legislation. And so that means getting all the capital, assuming that it's prudent capital and we think we are spending prudent capital, in at the rate effective date and then also the transitions from year to year. I can't say for sure the duration of the rate plan will file. All of this depends on the outcome of the current case, which Mark described, and we expect an order here before October 1. So, again, the legislation provides for the opportunity to bring in good capital up until the rate-effective date and then make transitions based on the capital spent from year to year going forward within the rate plan.

And one last question, Norm. Can you remind me, there's, you always have structural items that simply are not permitted recovery such that if you're given a headline number of authorized return, there's a certain number of basis points, you will be underneath it simply because they are fundamentally not permitted. And I'm trying to recall whether it's like about 70 basis points or something like that, that's been a consistent policy. of regulation for you in Washington?

You're spot on, Vanilla. It is 70 basis points is our expectation there. And it's really largely costs that are not allowed to recover from customers.

Okay. Just wanted to double check that. Thank you.

Thank you.

If you would like to ask a question, simply press star then number one on your telephone keypad. And we do have another question from the line of Julian DeMullen-Smith.

Hey, Cody here again. Just a couple of very quick follow-ups.

Hey, Cody.

So just wondering if you could share what you're assuming in terms of earned ROE for 21. I think previously you pointed to 7.7%, but wondering if that's updated with the guide here.

We're off from that. I didn't really do that calculation. I mean, we're lowering our utility guidance 10 cents, so I don't have that. It is lower than the 770. You can do the math if you want. Got it.

Got it. And then just wondering if there's any updates on the claims from the DNR on the BAB road fire. Any updates from when we last spoke?

Yeah, this is Dennis. Yeah, really no updates on that. You know, we're continuing to, you know, engage with the Department of Natural Resources constructively. We've had a few minor claims, but nothing material. And, you know, the DNR report has come out and We continue to stand by our position and believe that the fire was not caused by any of our equipment deficiencies or any concerns around that. It was just an unprecedented storm that knocked down a tree outside of our right-of-way that started the fire. So nothing new from what we've talked about in the past.

Okay. Okay. And then, are there any fires in your service territory now that we should be aware of?

Yeah, there's, well, as you can tell by watching the nightly news, if you do that, there's fires all over the Northwest, and, you know, there's been a few in and around our service area. Nothing that is material at this point, so at this time, no concerns. Obviously, it's, as I mentioned earlier, it's, you know, The air is smoky with all the fires in the northwest. We continue to monitor and manage our system accordingly to mitigate any adverse impacts. But the short answer is really nothing material at this point.

And the ones, Cody, to add to what Dennis was saying, the ones that have There's been some lightning, as some things have come through, and lightning, again, has caused it. Not any deficiencies in our equipment or anything with respect to our equipment. Yeah, that's correct.

Okay. Helpful. Thank you very much.

Thanks, Cody.

And we do have another question from the line of Vidula Murthy.

Uh, in terms of, um, uh, the reaffirmation of, uh, 2023, um, can you remind us kind of what the, in terms of that range, what the, uh, earned ROE was assumed to be in that period?

Again, we're getting to our allowed ROE minus the 70 basis points. So we're allowed about nine, four in, in our jurisdictions and assuming approvals from, you know, the different, you know, Idaho is still pending commission approval. But assuming approvals of the Idaho Commission and no change in Washington, assuming we get our current ROE, it's 9.4 in each of those jurisdictions with 70 basis points of lag. It would be about 8.7 from an ROE perspective.

Thank you very much.

Thanks, Madula.

And there are no further questions at this time. Mr. Wilcox?

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

This does conclude today's conference call. Thank you for your participation. You may now disconnect.