Q2 2021 Avista Corp Earnings Call
Your call is scheduled to begin shortly thank you for standing by we do appreciate your patience.
[music].
Good day, Thank you for standing by and welcome to the Avista Corp, Q2, 2021earnings conference call.
After the speakers at this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session.
I'll ask a question during the session you will need to press star 1 on your telephone please.
Please be advised that today's conference is being recorded.
If you require any further assistance. Please press star zero 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 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 Thies, Senior Vice President External affairs, and Chief customer Officer, Kevin Christie, and Vice President Controller, and principal accounting officer, Ryan Crafts homes.
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 on today's call.
Refer to our 10-K for 2020.
And 10-Q 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, or 20 cents per diluted share compared to 26 for the second quarter of 2020.
For the year to date consolidated earnings were $1.18 per diluted share for 2020.1.
<unk> to 98 cents last year now I'll turn the discussion over to Dennis.
Well, thanks, John and good morning, everyone.
Hope your summer is going well and that you are staying safe.
On June 30th Washington State officially listed lifted 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 load and customer growth is steady.
Like many other businesses, we continue to monitor the pandemic very closely and watch what's happening with variance.
And case count in our communities, we're ready enable 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 heatwave that brought with it several consecutive days of triple digit record breaking temperatures across the region.
On June 29th Spokane temperature soared to 109 degrees setting new record 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 years.
132 year history.
The intense temperatures combined with record high usage strained parts of our electrical system and cause some of the equipment that runs our electric grid to overheat 6 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 cost to serve our customers, which negatively affected the energy recovery mechanism or <unk>.
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.
For these reasons, we had to rely on thermal generation and purchased power at higher prices to serve those additional loads.
As a result, Avista utilities earnings were below expectations for the second quarter.
A L M 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 plant.
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 dry land mode since late June and.
Dry land mode decreases the potential for wildfires that could occur when re energizing our power line normally under normal conditions. These lines are located in the world and or forested areas are generally re energized automatically. However, during the current dry weather conditions Avista is line personnel physically patrol on out of Jerry.
Before he line is placed back into service. This can require more time to restore service, but a decrease as a potential fire danger.
This practice is in line with Avista is wildfire resiliency plan, which was released last year building on prevention and response strategies that had been in place for many years Avista has committed to a comprehensive 10 year wildfire resiliency plan that includes improved defense strategies and on.
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 are hearings have been held and we expect a decision by the end of September.
In Oregon, and 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 <unk> 15 per diluted share to a range of $2 and 3.
$2.2.23 per diluted share for.
For 2023, we are confirming our earnings guidance with a consolidated range from $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 will 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.
You Dennis and good morning, everybody I know everybody is sitting on the edge of their sheet waiting for the Blackhawks next acquisition, which is the Spokane Native we got Tyler Johnson, a 2 time Stanley Cup Champions, who is the Spokane native so we're pretty excited about that there's your hawks update.
As Dennis mentioned, we are confirming our 2021 earnings guidance.
Lowering our utility guidance for 'twenty, 1 and also 'twenty, 2 and confirming 23 consolidated guidance.
Our guidance I'll spend a little time on on our guidance assume among other things.
Finally, an appropriately rate relief in our jurisdictions, that's very important as we need Dennis mentioned, we we settled our Idaho case, we're still awaiting approval from the commissions, which we expect before those rates go into effect September 1.
For 2021, we expect Avista utilities to contribute in the range of $1.83 to $1.97 per diluted share in the lower end of our guidance in 'twenty, 1 and 'twenty 2 for the Avista utilities is primarily due to increased regulatory lag that's due to increased capital expenditures, primarily due to growth in <unk>.
Higher than expected depreciation expense, but that is we believe all time and we begin as we begin to plan for our next Washington General rate case to be filed early in the first quarter of 'twenty..2 we expect that to be a multiyear 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 cost, although the midpoint of our guidance range does not include any benefit or expense under the ERM in Washington, The increase in power supply cost has reduced the opportunity for us to be on the upper half of the guidance range.
And our current expectation for the ERM is a surcharge position within the 90.10 sharing company sharing band, which is expected to decrease earnings by <unk> <unk> per diluted share.
Call last quarter, our estimate for the earn for the year was in a benefit position, which was expected to add 6 cents per diluted share.
In addition, we are also absorbing more net power supply cost under the PCA in Idaho.
For 2021, as Dennis mentioned, we expect a.
L P to contribute 8 to 11.
And we increased the range in our other businesses by 10, which really offsets the utility reduction.
And that's largely due to a range of 5 to 8 of diluted share because of investment gains and the gain we experienced from the sale of Spokane steam plant.
Our guidance generally includes only normal operating conditions and does not include unusual or nonrecurring items until the effects are known and certain.
Moving on to earnings for the second quarter Avista utilities contributed <unk> 11 per diluted share compared to 26 in 2020.
Compared to the prior year, our earnings decreased due to an increase in net power supply cost as Dennis mentioned, mainly due to higher customer loads from the heat heat wave and we had lower than normal hydroelectric generation because of the hot and dry conditions, our hydro electric generation is about 91% of on.
Our expectations are normal for this year.
The ERM in Washington also move significantly had a pre tax expense of $7.6 million in the second quarter of 'twenty, 1 compared to a pre tax benefit of <unk> 4 million in 2020.
Year to date, we've recognized $3.3 million of expense in 'twenty, 1 compared to $5.6 million in benefit in 2020.
In addition to the power higher power supply cost. 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've returned to our original schedules and perform that maintenance and the <unk>.
Quarter.
The higher maintenance costs were partially offset by lower bad debts expense as we are continuing to deferred bad debt through our COVID-19 regulatory deferrals.
Moving on to capital as Dennis mentioned, we're committed to continuing to invest in necessary capital on our utility infrastructure. We currently expect Avista utilities to have increased capital expenditures up to $450 million in 2021, and $415 million in 2022 of her $445 million and 22%.
In 'twenty 3.
35% and $40 million increase in 2021 'twenty, 2 and $23.40 million or 23 as well and this is really to support continued customer growth our customer gross about 1.5%, which is up from a half a percent to 1% than 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 expense.
Yeah.
I'll now turn the call back over to John.
Thank you and now we'd like to open this call for questions.
If he would like to ask a question at this time simply press Star then the number 1 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 Julien Dumoulin Smith.
Of Bank of America.
Hey, How's it going everyone its actually Coty Clark on for Julien.
Good morning, Cody <unk>.
So a couple of questions here.
I guess first on the guidance reduction in 'twenty 2 I'm wondering if there's anything else that's driving that outside of just greater regulatory lag and power supply costs. I mean, it seems like those factors would drive that much of a delta are you, making any assumptions on the Washington rate case that that's kind of contributing to that dynamic or are you seeing.
Any increased insurance costs, just on the wallboard side.
Theres some theres some other nominal costs, we really highlighted the big drivers there are some other nominal costs on O&M, but it really is empower slide 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 didnt get moving to be the case. So we expect we still expect a fair outcome in our existing case, but realize as we move forward with how we spend our capital on the type of capital. We are seeing is that'll really get pushed into the <unk>.
Next case, which we expect to file like we said in early 'twenty.
'twenty 2.
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 Okay.
This is largely additional capital due to growth in depreciation.
There are some other small thing that's the main driver.
Got it and then just on 'twenty 3 guidance I guess all else equal you know you're investing more in 'twenty, 1 and 'twenty, 2 and then youre going to file that case.
And early 'twenty 2.
But you you kind of reaffirmed that guidance range for 'twenty 3 and also stated that you're still assuming that youre going to get to your authorized in 'twenty..3 so I'm just kind of wondering what's contributing to 2 your reaffirmation of that 'twenty 3 guidance range. I guess, you know from my perspective, it should be a little bit.
Higher.
But it wasn't it wasn't.
It wasn't a significant move in the capital assets over a 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 at a few cents. We just said we've maintained our range. We expect our 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.
It wasn't the capital move wasn't significant enough to move it it is improvement and Thats a positive but it wasn't enough to move our range for 'twenty 3.
Got it okay, Okay, I'll pass it off and jump back in the queue. Thanks.
Thanks Scott.
And your next question comes from the line of Sophie.
<unk> from Keybanc.
Hi, good morning, Thanks for taking my question.
Right.
Hey, Scott.
Maybe just to build on the previous question on a bit here. So you're talking about increasingly go to lag that's partially due to higher capex I suppose I'm from the attorney.
Are you correspondent line presuming your Capex outlook, maybe a misunderstanding here somewhere.
I'm not so.
Are you asking we are increasing our capex outlook is that your question and that is impact yes, yes, yes.
Yes, we are increasing our capex outlook. So we're going to go to $4.50 for this year and $4.45, and $4.45 for 'twenty 2 'twenty 3 that compares to $4.15 previously on 405 in 4 or 5 so it is a $35 million $40 million $40 million increase and it's largely due to growth in the cost of really doing the same <unk>.
<unk> 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 but.
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 very helpful color and so then.
Could you maybe give us a little bit more color on the <unk>.
Guidance revision on the other segment this year for 2020.1.
It goes from negative 5% to 2% positive price.
On the kind of a little bit more color on what accounts for that.
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 and the funds that were in were in with the energy impact partners and also the sale of steam plant. We had a we had a small gain on the sale of sale of steel plant square as well. So that's really hooked into our our actual result.
Yes.
Then we just look at that forward.
We're not expecting more significant gains if you that's really based on the actual results we had in the quarter.
Yes did you disclose what do you have on those phones is it kind of similar to energy venture portfolios, but 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 or 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.
No.
Continuously so we don't but we expect to invest about $15 million on our other businesses.
In the 20th.
'twenty, 1 and I believe also in 'twenty 2.
Yes, Yeah got it got it Okay, and then before I pass it all on maybe on the power supply situation. So clearly understand the hydro was an issue.
What is how do you think this is going to stack up on the second half as 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 this TSA in my opinion from kicks in here. So when we when we do our estimates for we said excuse me, we said <unk>.
Negative surcharge position that is for the year. So that does include our expectations for the year on what hydro will be.
Now what we do assume is normal hydro in the in the summer months and in the fall. We don't expect much rain typically but in the winter. We do so we do expect normal hydro conditions for the rest of <unk>.
The rest of the fall and into the winter so that could have some variability, but most of the variability typically again occurs in run off and that's why we are 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 we 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. They are correct.
Well, it's the arm.
Our power supply costs through so if the if the cost of natural gas on 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 at 90%.
So our impact thank you.
Thank you Sophie.
Your next question comes from the line of Videla Marti from Hudson Bay Capital.
Hi, Good morning, I'm wondering if at all how are you.
I am okay.
A couple of things I guess, 1 in terms of 2022, you indicated about depreciation with a toy line, but you also referenced.
Power costs, so is there like a <unk>.
Negative that you're incorporating for 2022 that we ought to be aware of.
While the power cost actually reset on our rate cases, so when we come out and give 'twenty 2 guidance, we will put that expectation and but our power costs will reset in our rate case, which in Washington, which we expect to be effective October 1 again, we still need commission approval on all of that in order, but we expect that to be effective October 1.
And in that case, we expect a reset power supply costs and then we will have a forward look on what impact that could have an R 22 expectations.
So thank.
Thank you guys net should we.
Okay that would be fair to say then that the.
That the revision downward for 2022 really is not tied to current costs at all it's more tied to 1.
Increased capex.
Plant and surface, that's not yet reflected in rates that type of thing.
Correct. There is some minor impacts to cost, but minor, it's really depreciation and capital.
Okay.
In terms of equity you up to 90 day, who use us.
Done it was at 1.616, such that there is.
74 left to do.
Correct.
Okay.
Now.
Given the elevated capital going forward is 90, now a better level on an annual basis.
If I recall properly where we're at.
<unk> 50 on an annual basis kind of every.
Every year going forward is down 19 number.
We've been in the $50 million to $75 million on average over the past several years I don't remember the exact numbers.
So.
It'll it'll depend on the cash flows that we have because it's also operating cash flow is help offset our needs for equity, but you know it will be will be in our normal range as 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, that'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 I don't 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 a.
Needing to do any type of day a.
Hey block on public type thing as opposed to your various stock plans and at ATM type of program that would that still looks to be sufficient.
Absolutely. The current ATM program that we have with with 4 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 that's called the Atwood pass on.
Yeah.
Questions comments about increasing capex in dealing with you.
I was just system issues.
My recollection is that the $400 million level approximately kind of.
Triangulated with what you felt.
As an appropriate level of increase in cost customers that balance the balance things out.
I'm wondering with increased Capex here.
Whether to the extent that you know that.
There might be.
Question, there because that's a little counter to what I recall previous discussions over the last day 18.
4 months.
Well, we've been at we've been at the $405 million level for many years I don't know 8 or 9 years I don't remember the exact year, we went up.
But we've been at that level for a long time so.
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 we had our plant consistently for a long time, So we decided and growth capital has gone up as we continue to add customers and where join.
In the energy imbalance market as well, so theres 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 we do have to manage and work through the cost pressures on affordability to our.
So we didn't you know we've.
<unk> 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 $4.45.
In the next few years.
And with the 1 to 22 great filing.
Can you talk a little bit about.
The multiyear abilities and some of the other.
Fast legislation provided you and how Q on how you are thinking about using dose to be able to collapse that collapses.
Collapses from regulatory lag for 'twenty, 3 and be able to earn whatever return on this.
You bet this is Kevin Christie.
Nice to chat with you here I wanted to discuss.
Describe that a little bit for you we have starting with 2022.
Acquirements file a multiyear rate plan it can be as few as 2 years and as many as 4 years.
And in that legislation that moved forward the ability to have the multiyear or the requirement to have the multiyear rate plan. It.
It sets.
Our processed or the ability to get the first year right. That's of course my words, not how it reads exactly on 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 some of all of this depends on the outcome of the current case, which Mark described and we expect an order here before October.
1 <unk>.
So again, it's the legislation provides for.
The opportunity to bring on 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 1 last question on.
Can you remind me.
There is you always have structural items that simply are not permitted capri such that if you're given a headline number authorized return there is 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 its like about 70 basis points or something like that that's been a consistent policy.
On top of.
Regulation for you on Washington, Youre spot.
Got on but it is 70 basis points as our as 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.
Yeah.
If you would like to ask a question simply press Star then the number 1 on your telephone keypad.
And we do have another question from the line of Julien Dumoulin Smith.
Hey, Cody here again, just a couple of very quick follow ups.
Mike.
So just wondering if you could share what you're assuming in terms of earned ROE for for 'twenty..1 I think previously you pointed to 7.7%, but but wondering if that's updated with the guide here.
We're off from that I didn't really do that calculation. We are I mean, we're low on our utility guidance 10, So I don't I don't have that it is lower than the 770.
You can do the math if you want.
Just Scott project.
Yes.
Got it and.
And then just wondering if theres any updates on the claims from the DNR on the on the Bad Road fire.
Any any updates from when we last spoke.
This is Dennis.
Really no updates on that.
You know we are.
We're continuing to.
You do engage with the.
Department National Natural resources Constructively, we've had.
A few minor claims, but nothing material and the DNR report has come out.
We continue to stand by our position and believe that.
Uh huh.
It was it was not the fire was not caused by any of our equipment deficiencies or any concerns around that I was just.
You know unprecedented.
Identive storm that.
Knocked out a tree outside of it right away and started the fire.
Got it.
Nothing new from what we've talked about the past okay.
And then are there any buyers on your service territory now that we should be aware of.
Yes, there is well there. So you can tell by watching the nightly news if you do that there's buyers all over the northwest and.
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 it's a.
It's really peak fire season and we.
They are smoky with all the fires in the in the northwest we continue to monitor and manage our system accord accordingly to that.
To mitigate any adverse impacts, but but the short answer is really nothing.
Material at this point.
And the 1 Scott to add to what Dennis was saying the ones that have.
Started theres been some lightning as some things have come through and lightning again.
As cost and not any deficiencies in our equipment or anything with with respect to our equipment, Yes, that's correct.
Okay.
Helpful. Thank you very much.
Thanks Cody.
Yeah.
And we do have another question from the line of Abdullah Murdy.
In terms of.
The reaffirmation of our 2000 twice a day.
Can you remind us kind of what the terms of that range what the R&R.
<unk> 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 94 in our jurisdictions.
Assuming approvals from the different 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 94 in each of those jurisdictions was 70 basis points of lag it would be about 8.7 from an ROE perspective.
Thank you very much.
Thanks.
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.
Yeah.
This does conclude today's conference call. Thank you for your participation you may now disconnect.
Hum.
Yes.
Okay.
[music].
Okay.
Okay.
Sure.
Okay.
[music].