Avista Corporation

Good day and thank you for standing by. Welcome to the Avista Corporation Q2 2023 earnings call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stacey Wentz. Please go ahead.

Good morning. Welcome to Avista's second quarter 2023 earnings conference call. Our earnings and our second quarter 10Q were released pre-market this morning. Both are available on our website. Joining me this morning are Avista Corp President and CEO Dennis Vermillion, Senior Vice President CFO, Treasurer and Regulatory Affairs Officer Kevin Christie, and Vice President, Controller, and Principal Accounting Officer Ryan Krasult. Today, we will make certain statements that are forward-looking. These involve assumptions, risks, and uncertainties which are subject to change. The information we will share this morning is based on our current expectations of normal precipitation, temperatures, and other operating conditions, as well as below normal hydroelectric generation as of today's date. And various factors could cause actual results to differ materially from expectations discussed in today's call. please refer to our 10-K for 2022 and our 10-Q for the second quarter of 2023, which are available on our website for a full discussion of these risk factors. I'll begin by recapping the financial results presented in today's press release. Our consolidated earnings for the second quarter of 2023 were 23 cents per diluted share compared to 16 cents for the second quarter of 2022. For the year-to-date consolidated earnings,

96 cents per diluted chair for 2023 compared to 1.15 last year i'll now turn the call over to dennis well thanks stacy and good morning everyone i hope you're all enjoying the summer so far it's been a hot one for sure um i'd like to begin this morning by congratulating our employees who recently won one of the Chartwell's Best Practices Awards in outage operations for Avista's weather and incident forecasting tool. This innovative tool leverages our historical database for weather, infrastructure, and previous outages to predict future outages. It allows us to proactively plan and prepare for potential weather events, which helps us better utilize our resources, it improves our response times, and enhances the overall customer experience. This is just one great example of how Avista's spirit of innovation informs how we approach what we do every day to deliver safe, reliable energy to our customers. In that spirit, we are continuing to invest capital across our service territory to harden the grid, maintain and upgrade our infrastructure, and enhance reliability for customers, while at the same time moving closer to earning our allowed return. Regarding rate cases, we've made significant progress on the regulatory front this year, We reached a multi-party settlement agreement in our Idaho rate cases and new electric and natural gas rates will go into effect in September. We also reached a settlement in principle in our Oregon general rate case, which is in line with our expectations. In June, we filed our 2023 electric integrated resource plan with the Washington and Idaho commissions. And you might remember every two years we produce an electric IRP which details projected growth and demand for energy, and then the new resources that we'll need to serve our customers over the next 20 years. Thanks to the resource selections from our recent all-source RFP, we are in really good position to meet our customers' needs now and into the future. With respect to earnings, our results are slightly ahead of our expectations for the first half of the year, and I'd like to Take a minute just to acknowledge our leaders and employees for their ongoing actions to manage our costs, to offset the impacts of inflation that we continue to experience, including higher interest rates and additional financing costs. Our results show the good work and the benefit of these efforts. We are confirming our annual consolidated guidance for 2023 with a range of $2.27 to $2.47. However, we expect to be in the lower end of the range due to higher than expected costs under the IRM in Washington, resulting from faster than normal snow melt and one of the worst hydro years we've seen in many, many years. Now, I'd like to turn this presentation over to Kevin, who will share more about our earnings. Kevin.

Thanks, Dennis, and good morning, everyone. I'm excited to be here this morning in my first earnings call as CFO. It was a pleasure to meet or get acquainted with many of you at AGA this past May, and I'm looking forward to working more closely with our investor community in the future. I'd like to thank the finance, accounting, and regulatory leadership and their amazing teams here at Avista. They're a great group who have made the CFO transition go quite smoothly. As we turn to earnings, Avista Utilities earnings increased in the second quarter of 2023 compared to the second quarter of 22. We've seen increased margin, as a result of our general rate cases, customer growth, and lower costs under the IRM compared to the second quarter of last year. In the second quarter of this year, the IRM was a pre-tax benefit of $1 million compared to a pre-tax expense of $4.8 million in the second quarter of last year. Year to date, we've recognized a pre-tax expense of $6.5 million in the IRM compared to pre-tax expense of $2.8 million last year. For the full year, we now expect higher costs under the IRM and expect to end the year in the 90% customer 10% company sharing band with a decrease to earnings of $0.08 per diluted share. Recognizing the volatility in the IRM, we are examining whether the IRM is the most appropriate cost-sharing mechanism for Washington going forward. We continue to be committed to investing the necessary capital in our utility infrastructure. We expect Avista Utilities' capital expenditures to total $475 million in 2023, and we're well on our way as our capital expenditures were $220 million in the first half of the year. We expect AAL&P's capital expenditures to be $19 million in 2023, and we expect to invest $15 million in our other businesses in 2023. First half of the year was a busy time for our Treasury team as we increased the capacity our line of credit facility from $400 million to $500 million and terminated our $100 million revolving credit facility. As of June 30, we have $292 million of available liquidity under our committed lines of credit and $34 million available under our letter of credit facility. During 2023, we intend to issue $120 million of common stock, including $60 million issued thus far this year. Like Dennis mentioned, we're confirming our 2023 consolidated earnings guidance of $2.27 to $2.47 per diluted share, with Avista Utilities contributing in the range of $2.15 to $2.31 per diluted share. The midpoint of our Avista Utilities guidance does not include any expense or benefit under the IRM. As also mentioned, we expect to be in the lower end of the range at Avista Utilities and on a consolidated basis due to higher than expected costs under the IRM resulting from this year's poor hydro conditions. For the year, we expect the IRM to be in the 90% customer, 10% company sharing band, with a decrease to earnings of $0.08 per diluted share. As we mentioned last quarter, our 2021 Washington-Idaho general rate cases included customer tax credits that offset the bill impact of rate increases. The tax credits that started in 21 will be fully returned to customers by the end of the third quarter of 2023, and will no longer reduce both customer bills and income tax expense, resulting in an increase in utility margin and our annual effective tax rate. Our annual tax provision is spread throughout the year as a percentage of pre-tax income. Our earnings for the first half of the year represent 45% of our forecast annual utility earnings. We expect the distribution of the remaining annual utility earnings to be about 5% in the third quarter and 50% in the fourth quarter. This distribution excludes any impact of the IRM. Our guidance assumes timely and appropriate rate relief in all jurisdictions. We expect AEL&P to contribute in the range of $0.08 to $0.10 per diluted share in 2023. We recognize net losses in our other businesses primarily due to valuation adjustments. Quarterly valuations of certain investments introduce some additional volatility to earnings, but these more frequent updates increase the transparency of our investment value. Overall, we expect our other businesses to contribute earnings of $0.04 to $0.06 per diluted share for the year. Now I'll turn the call back over to Stacey for your questions.

Thanks, Kevin. We welcome your questions.

Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 11 again. We'll pause for a moment while we compile our Q&A roster.

Our first question comes from Willard Granger with Missoula. Your line is open. Willard Granger with Missoula. Your line is open. Willard Granger with Missoula. Your line is open. Willard Granger with Missoula. Your line is open. Willard Granger with Missoula. Your line is open. Willard Granger with Missoula. Your line is open. Willard Granger with Missoula. Your line is open. Willard Granger with Missoula. Your line is open.

Willard Granger with Missoula. Your line is open. Willard Granger with Missoula. Your line is open.

Willard Granger with Missoula. Your line is open. Willard Granger with Missoula. Your line is open. Willard Granger with Missoula. Your line is open. On the Q1 call, you mentioned that you were anticipating some positive uplift from the IRM. Now, in your prepared remarks, you mentioned that you're experiencing higher than expected costs. Can you talk a little bit about what you're seeing here and how that impacts your 2023 guidance?

Yeah, yeah, happy to. You know, on the Q1 call, we We were sitting really with pretty decent snowpack and hydro forecasts, not only for our company, but for the region. If you'll recall, up until May, the springtime for us was really very colder than normal. The snowmelt was less than it would be in a normal year. um and so when you're you're in that situation you look well we've got good snow melt if we have a nice slow melt like we normally would hope to have then you would have really good hydro the rest of the year as that snow comes off and what ended up happening uh is may was very warm not only for our service area but the entire region and all the snow really came down in one month so the may hydro numbers were pretty good but a lot of that water then is just wasted because you there's too much of it you can't generate so what that ended up doing to us is you know with a cold spring we were a little bit below normal up until that point hope expecting to make that up because the snow would come ratably down the mountain and mountains and it didn't work that way and a lot of it just was flushed out of the system and was unusable certainly not at the time of the year when you want it also so that change just in in weather and in May really impacted the hydro forecast, not only for us, but it's a region-wide thing. And that is really what swung the ERM around based on what we were projecting at that point in time in May.

Yeah, let me build on that, Dennis. We were at 3 cents positive when we met last quarter. And now, as you've heard here, we're expecting to be at 8 cents on the other side. So that's a pretty significant swing, and that goes to the weather that Dennis described. And that's why we're indicating that if it weren't for the ERM, we would have pretty strong results here, fair and balanced results. But that does bring us down towards the bottom end of our range, as we said earlier. Understood. Thank you.

If I could just follow up, maybe switching gears here, on the balance for the second half of 2023, what are the puts and takes to hitting your guidance in Q4 of last year? Specifically, you had about 25 cents of a positive mark to market from a biotech investment. Should we expect something similar in the back half of the year? How should we be thinking about that?

I don't think there's a set shape to the investment profile, and you're referring to our non-reg investment portfolio overall. I don't think there's a set shape, but as we indicated earlier in the call, we expect overall to be in the $0.04 to $0.06 range on our non-reg investments. We're down for the year thus far compared to prior periods, and we would expect some turnaround there to get to that $0.04 to $0.06 range.

Understood. I'll leave it there. Thank you, team.

Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Stacey.

Thank you very much. Thank you for joining us today and for your interest in Avista. Have a great day.

Ladies and gentlemen, this does conclude today's presentation.

You may now disconnect and have a wonderful day. Music Thank you. Thank you.

Thank you.

Good day and thank you for standing by. Welcome to the Avista Corporation Q2 2023 earnings call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stacey Wins. Please go ahead.

Good morning. Welcome to Avista's second quarter 2023 earnings conference call. Our earnings and our second quarter 10Q were released pre-market this morning. Both are available on our website. Joining me this morning are Avista Corp President and CEO Dennis Vermillion, Senior Vice President CFO, Treasurer and Regulatory Affairs Officer Kevin Christie, and Vice President, Controller, and Principal Accounting Officer Ryan Krasult. Today, we will make certain statements that are forward-looking. These involve assumptions, risks, and uncertainties which are subject to change. The information we will share this morning is based on our current expectations of normal precipitation, temperatures, and other operating conditions, as well as below normal hydroelectric generation as of today's date. And various factors could cause actual results to differ materially from expectations discussed in today's call. please refer to our 10-K for 2022 and our 10-Q for the second quarter of 2023, which are available on our website for a full discussion of these risk factors. I'll begin by recapping the financial results presented in today's press release. Our consolidated earnings for the second quarter of 2023 were 23 cents per diluted share compared to 16 cents for the second quarter of 2022. For the year-to-date consolidated earnings,

96 cents per diluted chair for 2023 compared to 1.15 last year i'll now turn the call over to dennis well thanks stacy and good morning everyone i hope you're all enjoying the summer so far it's been a hot one for sure um i'd like to begin this morning by congratulating our employees who recently won one of the Chartwell's Best Practices Awards in outage operations for Avista's weather and incident forecasting tool. This innovative tool leverages our historical database for weather, infrastructure, and previous outages to predict future outages. It allows us to proactively plan and prepare for potential weather events, which helps us better utilize our resources, it improves our response times, and enhances the overall customer experience. This is just one great example of how Avista's spirit of innovation informs how we approach what we do every day to deliver safe, reliable energy to our customers. In that spirit, we are continuing to invest capital across our service territory to harden the grid, maintain and upgrade our infrastructure, and enhance reliability for customers, while at the same time moving closer to earning our allowed return. Regarding rate cases, we've made significant progress on the regulatory front this year, We reached a multi-party settlement agreement in our Idaho rate cases and new electric and natural gas rates will go into effect in September. We also reached a settlement in principle in our Oregon general rate case, which is in line with our expectations. In June, we filed our 2023 electric integrated resource plan with the Washington and Idaho commissions. And you might remember every two years we produce an electric IRP which details projected growth and demand for energy, and then the new resources that we'll need to serve our customers over the next 20 years. Thanks to the resource selections from our recent all-source RFP, we are in really good position to meet our customers' needs now and into the future. With respect to earnings, our results are slightly ahead of our expectations for the first half of the year, and I'd like to Take a minute just to acknowledge our leaders and employees for their ongoing actions to manage our costs, to offset the impacts of inflation that we continue to experience, including higher interest rates and additional financing costs. Our results show the good work and the benefit of these efforts. We are confirming our annual consolidated guidance for 2023 with a range of $2.27 to $2.47. However, we expect to be in the lower end of the range due to higher than expected costs under the IRM in Washington, resulting from faster than normal snow melt and one of the worst hydro years we've seen in many, many years. Now, I'd like to turn this presentation over to Kevin, who will share more about our earnings. Kevin.

Thanks, Dennis, and good morning, everyone. I'm excited to be here this morning in my first earnings call at CFO. It was a pleasure to meet or get acquainted with many of you at AGA this past May, and I'm looking forward to working more closely with our investor community in the future. I'd like to thank the finance, accounting, and regulatory leadership and their amazing teams here at Avista. They're a great group who have made the CFO transition go quite smoothly. As we turn to earnings, Avista Utilities earnings increased in the second quarter of 2023 compared to the second quarter of 22. We've seen increased margin, as a result of our general rate cases, customer growth, and lower costs under the IRM compared to the second quarter of last year. In the second quarter of this year, the IRM was a pre-tax benefit of $1 million compared to a pre-tax expense of $4.8 million in the second quarter of last year. Year to date, we've recognized a pre-tax expense of $6.5 million in the IRM compared to pre-tax expense of $2.8 million last year. For the full year, we now expect higher costs under the IRM and expect to end the year in the 90% customer 10% company sharing band with a decrease to earnings of $0.08 per diluted share. Recognizing the volatility in the IRM, we are examining whether the IRM is the most appropriate cost-sharing mechanism for Washington going forward. We continue to be committed to investing the necessary capital in our utility infrastructure. We expect Avista Utilities' capital expenditures to total $475 million in 2023, and we're well on our way as our capital expenditures were $220 million in the first half of the year. We expect AAL&P's capital expenditures to be $19 million in 2023, and we expect to invest $15 million at our other businesses in 2023. First half of the year was a busy time for our Treasury team as we increased the capacity of our line of credit facility from $400 million to $500 million and terminated our $100 million revolving credit facility. As of June 30, we have $292 million of available liquidity under our committed lines of credit and $34 million available under our letter of credit facility. During 2023, we intend to issue $120 million of common stock, including $60 million issued thus far this year. Like Dennis mentioned, we're confirming our 2023 consolidated earnings guidance of $2.27 to $2.47 per diluted share with Avista Utilities contributing in the range of 215 to 231 per diluted share. The midpoint of our Avista Utilities guidance does not include any expense or benefit under the IRM. As also mentioned, we expect to be in the lower end of the range at Avista Utilities and on a consolidated basis due to higher than expected costs under the IRM resulting from this year's poor hydro conditions. For the year, we expect the IRM to be in the 90% customer, 10% company sharing band, with a decrease to earnings of $0.08 per diluted share. As we mentioned last quarter, our 2021 Washington-Idaho general rate cases included customer tax credits that offset the bill impact of rate increases. The tax credits that started in 21 will be fully returned to customers by the end of the third quarter of 2023, and will no longer reduce both customer bills and income tax expense, resulting in an increase in utility margin and our annual effective tax rate. Our annual tax provision is spread throughout the year as a percentage of pre-tax income. Our earnings for the first half of the year represent 45% of our forecast annual utility earnings. We expect the distribution of the remaining annual utility earnings to be about 5% in the third quarter and 50% in the fourth quarter. This distribution excludes any impact of the IRM. Our guidance assumes timely and appropriate rate relief in all jurisdictions. We expect AEL&P to contribute in the range of $0.08 to $0.10 per diluted share in 2023. We recognize net losses in our other businesses primarily due to valuation adjustments. Quarterly valuations of certain investments introduce some additional volatility to earnings, but these more frequent updates increase the transparency of our investment value. Overall, we expect our other businesses to contribute earnings of $0.04 to $0.06 per diluted share for the year. Now I'll turn the call back over to Stacey for your questions.

Thanks, Kevin. We welcome your questions.

Ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone. If your question has been answered or you wish to move yourself from the queue, please press star 11 again. We'll pause for a moment while we compile our Q&A roster.

Our first question comes from Willard Granger with Missoula. Your line is open.

Willard Granger with Missoula.

Hi, good morning.

Hey, good morning.

Good morning. Thanks for taking my question. On the Q1 call, you mentioned that you were anticipating some positive uplift from the IRM. Now, in your prepared remarks, you mentioned that you're experiencing higher than expected costs. Can you talk a little bit about what you're seeing here and how that impacts your 2023 guidance?

Yeah, happy to. You know, on the Q1 call, we We were sitting really with pretty decent snowpack and hydro forecasts, not only for our company, but for the region. If you'll recall, up until May, the springtime for us was really very colder than normal. The snowmelt was less than it would be in a normal year. um and so when you're you're in that situation you look well we've got good snow melt if we have a nice slow melt like we normally would hope to have then you would have really good hydro the rest of the year as that snow comes off and what ended up happening uh is may was very warm not only for our service area but the entire region and all the snow really came down in one month so the may hydro numbers were pretty good but a lot of that water then is just wasted because there's too much of it you can't generate. So what that ended up doing to us is, you know, with a cold spring, we were a little bit below normal up until that point, expecting to make that up because the snow would come ratably down the mountains and it didn't work that way. And a lot of it just was flushed out of the system and was unusable. Certainly not at the time of the year when you want it also. So that change just in in weather and in may really impacted the hydro forecast not only for us but it's a region-wide thing and uh that is really what swung the urn around based on what we were projecting at at that point in time in may yeah let me build on that dennis we were at three cents positive when we met last quarter and uh now as you've heard here we're expecting to be at eight cents on the other side

So that's a pretty significant swing, and that goes to the weather that Dennis described. And that's why we're indicating that if it weren't for the ERM, we would have pretty strong results here, fair and balanced results. But that does bring us down towards the bottom end of our range, as we said earlier. Understood. Thank you.

If I could just follow up, maybe switching gears here, on the balance for the second half of 2023, what are the puts and takes to hitting your guidance in Q4 of last year? Specifically, you had about 25 cents of a positive mark to market from a biotech investment. Should we expect something similar in the back half of the year? How should we be thinking about that?

I don't think there's a set shape to the investment profile, and you're referring to our non-reg investment portfolio overall. I don't think there's a set shape, but as we indicated earlier in the call, we expect overall to be in the four to six cent range on our non-reg investments. We're down for the year thus far compared to prior periods, and we would expect some turnaround there to get to that four to six cent range.

Understood. I'll leave it there. Thank you, team.

Again, ladies and gentlemen, if you have a question or a comment at this time, please press star 1-1 on your telephone.

And I'm not showing any further questions at this time. I'd like to turn the call back over to Stacey.

Thank you very much. Thank you for joining us today and for your interest in Avista. Have a great day.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.