Q2 2019 Earnings Call
My name is Hilda and I will be your operator for today.
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I will now turn the call over to Mr., John Wilcox Mister Wilcox you may begin.
Thanks, Hilda good morning, everyone and welcome to Avistas second quarter 2019 earnings Conference call.
Our earnings were released pre market. This morning and are available on our website.
Joining me. This morning are Mr. Corp, Chairman of the board and CEO , Scott Morris, if it's a core president Dennis Vermillion.
Your vice President and CFO Mark fees.
Thanks, Chris <unk> external affairs and chief.
Customer officer, Kevin Christie.
And vice President and controller Ryan Krasselt.
I would like to remind everyone that some of the statements 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 on today's call.
Please refer to our 10-K for 2018 and 10-Q for the second quarter of 2019, 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 2018, or 38 cents per diluted share compared to 39 cents for the second quarter of 2018.
For the year to date solid earnings were $2 or 14 cents per diluted share for 2019 compared to $1.22 last year now I will turn the discussion over to Scott well. Thank you John and good morning, everyone.
As we have previously announced I will be retiring effective March 1st 2020.
Dennis Vermillion will be taking over as CEO on October Onest 2019.
I've been honored to lead this company and serve alongside exceptional a dedicated employees for nearly 40 years.
I'm incredibly proud of what we've accomplished together and look forward to continuing my service on your best aboard as this company continues to achieve great outcomes.
For those that serve.
We've been diligent and deliberate in the succession planning of our company.
Over the years and I have every confidence and Dennis.
Yes, the next CEO and has the ability to successfully lead of Vista into the future.
Dennis has clearly demonstrated his commitment to this company and his deep leadership experience and extensive expertise in all aspects of the company.
Positions him well to shape the next evolution of the company.
Earlier this year, we were proud to celebrate I've, just as 100 Thirtyth birthday.
To Mark this historic event of estimate a commitment of $7 million to find initiatives that strengthened our local communities.
This major philanthropic contribution is the latest example of a best as long a rich tradition of championing the communities we serve.
For decades, we've worked side by side.
With our community members to make the places, we where we live better stronger and more resilient.
Well infuse $7 million into our communities over the next three years.
It's earmarked to focus on three initiatives first homelessness.
We know communities, both large and small face this complex issue and just to watch to help find solutions.
Second small town price, we want to strengthen.
Communities by solving tough problems building resilience and continuing to care for our neighbors and third.
Success, we recognize that today's you face many challenges and that's why we're investing in initiatives that will set our youth on an exciting path for the future.
We know that we can accomplish great things when we partner with each other and I'm really excited about the possibilities.
With regards to our quarterly earnings.
We had a strong second quarter as our earnings benefited from lower operating costs and better than expected customer growth.
These increases were partially offset by their donation commitment I just spoke about.
Hey, Alan P. were solidly above our expectations and expected to meet our full year guidance.
At our other businesses, we completed the sale of our six Gupte excuse me of our subsidiary mental effects in the second quarter, which resulted in about a $2.3 million gain and we also had earnings from some of our other investments.
Regarding regulatory matters in July we were able to reach an all party settlement in principle for the remaining issues of our natural gas general rate case in Oregon.
And we expect to file this agreement later in August .
In June we filed an electric general rate case in Idaho, and we continue to work through the regulatory process in Washington.
We expect these cases to provide rate relief in early 2020.
And begin reducing the regulatory lag that we've been experiencing.
Based on the 2019 results to date for the full year of 2019, we are raising our earnings guidance by five cents per diluted share to consolidate a range of $2.83 to three or three per diluted share.
This includes a dollar one per diluted share for the termination fee received from hydro one in the first quarter.
Which was partially offset by the payment of remaining transaction costs.
We're raising earnings guidance due to the gain of the sale of mental effects and earnings for investments at our other businesses and now I'm going to turn it over to Mark. Thank you Scott. Good morning, everyone. I just want everybody to Mark October 4th on their cap on their calendars as the Blackhawks open in the Czech Republic against the Philadelphia Flyers. So it's a good date to get on your calendars early.
The second quarter of 2019 of this to utilities contributed 32 cents per diluted share compared to 37 cents last year.
And on a year to date basis. We've contributed this utilities is contributed to dollars or to.
Cents per diluted share an increase from $1.21 last year the increase in the year to date was primarily due to the termination payment.
From hydro one as well as the positive impact of general rate increases and customer growth. These increases were.
Offset by transaction costs associated with hydro, one and that payment and then.
Increased transmission and distribution on them and the donation commitment that Scott mentioned earlier.
The urban Washington was a pre tax benefit of $6 million in the second quarter compared to a benefit of $1 million in the second quarter of 18.
Year to date, we've recognized the benefit of three and a half million dollars compared to $5.8 million benefit in 2018.
We continue to be committed to investing the necessary capital in our utility infrastructure.
And we expect to see utilities to have an increased capital expenditure of three or $435 million and the $30 million increase results primarily from additional capital expenditures for a group of renewable integration for a wind project and additional customer growth.
As of June Thirtyth, we have $212 million of available liquidity.
Under our credit facilities, and we expect to issue approximately $180 million of long term debt and up to $65 million of equity in order to refinance maturing long term debt fund, our additional capital expenditures and our existing capital expenditures and then maintain an appropriate capital structure. This does represent an increase as I mentioned with the 30 million higher capital.
As Scott mentioned earlier, we are raising our guidance for two of consolidated range of 283 to 3.3 per diluted share, which is a five cent increase on both ends.
And that increase includes the termination fee paid to hydro one and the payment of transaction costs and we're raising the guidance primarily because the gain on mental effects is now known typically we don't include those in guidance until they're known and included in our results and that occurred in the second quarter.
Going forward, we continue to strive to reduce regulatory timing lag and more closely align our earned returns for those authorized by 2022.
To achieve this we anticipate annual earnings growth of 9% to 10%.
From 20.8 through 2022.
With a return to normal 4% to 5% growth following 2022 in the in the earnings growth is calculated based on the midpoint of our original 2019 earnings guidance as a starting point.
Which all but also excluding the dollar one.
Termination payment from hydro one.
These these growth rates really are the only way we achieve those if we get timely recovery in all of our jurisdictions.
From the rate cases that we've been filing and we expect to defy expect to file.
We expect the Vista utilities to contribute in the range of 272.
Two to 86 per diluted share again, including the dollar one transaction cost the midpoint of our guidance does not include any expense or benefit under the year. We currently expect that to be in the 70 525 sharing band.
Which is expected to add approximately five cents per diluted share.
Our outlook for Avista utilities assumes among other variables normal precipitation temperatures and below normal hydro electric generation for the remainder of the year, we're about 90% of hydro and our expectation for this year. So we do include that in our expectations.
For 2019, we expect the elpida contribute in the range of nine to 13 cents per diluted share and our outlook bear again assumes among other variables normal precipitation and hydroelectric generation for the remainder of the year.
The change in our guidance as we expect our other businesses to contribute earnings in the range of two cents to four cents per diluted share an increase from five five cents from previous guidance and again due to the gain on metal FX sale as well as other investment gains from our other business.
Our guidance generally includes only normal operating conditions and does not include unusual items or settlements or acquisitions and dispositions until the effects are known and certain.
I will now turn the call back over to John .
And now we will open this call for questions.
Thank you we will now begin the question and answer session.
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We have a question from Richard generally from Bank of America Merrill Lynch.
Hey morning can you hear me.
Good morning, AST weekend area.
All right Great just wanted to touch on the recently acted.
Washington legislation I know the commission recently, how the workshop on its implementation just curious if any feedback are sticking points, thus far and maybe specifically around the 2% cost cap.
Hi, This is Kevin Christy Thanks for the question. The workshop really was a procedural workshop and we didn't get in the any of the details at that level.
Specifically to 2%.
Okay. So no.
Initial feedback in general on us.
No. We're really just talking about the process and the steps to move forward to implement.
Okay got it.
And separately.
You raised your guidance here largely on the metal FX south.
And your other business you raise it.
Two to four cents from a loss.
I'm, just curious how you're thinking about that going forward.
Are you still expecting a loss on that business like you have than historically or.
Yet or anything else, adding Jeremy I think changes due to the gain so yes.
You won't you wouldn't expect again in the future of that so that'd be stripped out and we would we would be back now we do expect those businesses as we go.
Through the course of time to begin making money with the investments we've been making especially.
With.
Energy impact partners has been has been successful and some of their early investments and we continue to invest there. So.
But you are you are correct you strip that out and going forward. We do so we do have some historical losses in that area, we expect that to continue.
All right great. That's all I had thanks a lot.
Thank you.
The next question comes from Paul Patterson from Glenrock Associates.
Good morning, guys.
Morning, Paul.
Just a follow up on that I guess.
In terms of these investing so you're not really expecting.
How should we think in general about this business like this.
You see the track basically going back to a loss is that what you're saying and this is just sort of a onetime gain or or is this sort of some portfolio management that we should be thinking about in terms of the.
This this.
This is a very very small piece of our business at times and we invest in these investments some of them. Many of them are in our local communities in there.
Settlements community development, and we have small losses.
Very small losses, and we did have a gain on this one had metal FX was a legacy company, we've owned that for for a very long time and.
And exited with a gain so it will revert to a small loss, but overtime. We do expect those to turn profitable. It's just a very small part of our business. So we don't spend a lot of time on those units generally less than a nickel share.
In our guidance, we expect that to continue if there was a loss, but we do expect as we move forward to generate gains through these investments that we're making today.
So we do expect that to turn around but we don't give guidance beyond.
The next year or two.
We've given some growth rates now because of where we are with lag but on the other businesses. We will ultimately expect that to get back to earnings but in the near term it'll probably revert to a small loss.
Okay, and then just in the release there was discussion.
The tax rate being negative 7.5%.
It seems that it's related to the.
Settlement and I just.
I apologize, but could you just elaborate a little bit more exactly what is going on with the tax rate.
And.
No just sort of how it dovetails into the settlement in other words through the earnings impact associated with US if it has any and then.
Just in general what the normalized.
With the tax rate you see for 2019, and just sort of your thinking about the tax rate in 2020 and beyond.
Well I think the normalized tax rate, we expect to see for the years about 16%. So.
We did have we did have some unusual things occur in the second quarter and and they were offsetting some depreciation changes so.
Overall, we statutory rates of 21%, we have some small state taxes and certain other states we have we expected.
Probably to be in the 16% to 17% range as an effective tax rate over time.
Okay, and the negative 7.5% that was could you just elaborate a little bit more going on there in other words did have any earnings impact.
Outside of that sounds like it was associated the colstrip deal and I apologize for not being on top of that but could you just elaborate a little bit more what.
What happened there.
Yes, well so yes, we were offsetting the additional depreciation at Colstrip, So really it had no earnings impact.
Okay, and just in general we should be thinking 60% to 70% roughly speaking.
On a normalized basis going forward.
Yes, okay. Thanks, so much guys.
Thank you Paul.
The next question comes from Sophie Karp from Keybanc.
Hi.
Good morning, guys.
<unk>.
Well go to yourself, if you could I don't know if you need to move closer. So we can barely hear you.
Oh is it better.
Better.
Okay, great. Thank you. Thanks for taking my question. So I'm just sort of quick obviously this year there has been a little bit of a noise in the numbers and you had the the fee that you booked from the merger and then you have the gain on the sale of this business could you maybe just the crystallize it a little bit better for us what should we be thinking about what the earnings would have been without those items. This year as a base for future growth. That's what we should be thinking as a base right. So what would have been without those items and we get more recently about you take out. The dollar one is the termination fee net of any costs associated with the termination fee.
So you would take that out of the of the consolidated guidance and the utility guidance and then you would also you know again, we raised guidance nickel a share largely due to the gain on metal FX and other other earnings. So I would say just for ease of calculation. If you took out a nickel on the other.
That would that would get you back to kind of a baseline and then again, we do expect to have the higher growth as we get as we trend towards getting back to earning our allowed return by 2022.
So in 2020, we would expect to have that 9% to 10% growth off of the midpoint of our original guidance.
And that takes off the dollar one termination fee.
And it's a dollar Ron and the five cents from lax.
Japan should be taken if you're taken original guidance you don't have to do the five cents. If you take today's guidance you do the five cents as well.
Got you. Thank you.
The next question comes from the two lot more Ti from Avon capital.
Hi, good morning.
Ivan.
Just want to make sure I understood the answer to Paul Pattersons question.
With the what you're saying is that the negative 7.5% tax rate associated with much higher depreciation expense such that if we go forward into future say 2020, and the tax rate normalizes the associated higher depreciation expense goes away and that's why there is no net income effect.
There's no net income effect in this quarter, our depreciation of the future again will be.
We'll be impacted I mean, the you'll you'll have some offset with the taxes in the future as you're continuing to roll forward, a higher depreciation on colstrip, but that will be offset and it won't have the same impact on an annual basis as it happened to do in this quarter. Because we also had a one time change there. So we're doing a little catch up.
You don't even think about it for the future.
It's going to be offsetting any costs or any additional depreciation it accelerating that the 20 to 25.
So.
At this point.
The taxes, it's this quarter that has the impact.
And we'll provide our guidance for the future stands as what Weve said, you don't know if I I'm not going to get into details of every line item event is it does not affect our guidance going forward.
Okay and.
In terms of the the contribution.
That was made the $7 million.
Should we consider that as a one time type of item or is this something that.
Periodically over over every few years or something like that as part of your communities are.
Community activities.
Occurs if you just.
Help me think about that a little bit because just reading the release it did strike me as kind of as a.
As a onetime item that I should not be obvious I shouldn't be.
Perpetuating in any material fashion.
No the $7 million was a reflection of our 130 anniversary and we wanted to do something unique and impactful for the communities that we serve so.
Well that was a onetime.
Yes.
Contribution. In addition, though we do have around $2 million a year that we do philanthropically, but we've done that.
Really for the last 20 years so.
That onetime 7 million is is a unique.
Contribution.
So it would be appropriate to them.
Oh for an ongoing basis to at least remove that $7 million.
Yes.
Okay. Thank you very much.
Thank you Bill.
The next question comes from Chris Ellinghaus from Williams capital.
Hey, guys good morning.
Good morning, Chris.
Can you give us any more color on the other non regulated income that you discussed in the press release and if you can can you give us any kind of number on that.
A very small and it's really just certain of the certain of the investments that we have there is a number of them that kind of go both ways. They have they have valuations that increase or decrease in the end you know recently, we're starting to see more.
Increases as as.
We focused our strategy there historically, we've had losses there.
But it's a very small number Chris So you know a penny or two maybe at this point. So I I don't really want to Overstressed that amount. We had the gain that was the biggest driver and we've got some small increases on the other investments we do expect that to increase as we go through time, but currently it is not expected to be very large.
Okay, and I'm, a little bit confused on the on the contribution was the full 7 million in the quarter I thought Scott had said that would be over three year period, while the cash impact will be over three years as it gets donated but we took the expense because it went to the foundation we invested in the foundation.
So we took the expense in the quarter.
Okay.
And.
Based on the Idaho filings.
Can you give us a sense of what your thoughts are on what the gas business in Oregon or in Idaho is going to earn this year Im sorry.
Well, we're not I mean.
We did not file a gas case in Idaho. So by default. We believe we are earning at or near our allowed return.
Because we didnt file a case needing additional.
Additional earnings or recovery of costs, so that that would be our view on that we only file an electric only in Idaho.
Yeah, that's kind of what I was getting at is I thought you had filed a notice of intent, but never filed a case. So just wanted to check and make sure you're correct Chris.
Your your your thought process changed at some point.
No. Our thought process is always that way if we feel we're earning our allowed return or have the ability to earn our allowed return we don't file a case, but in situations as we continue to grow our capital budget.
And grow our rate base, we need to file a rate case had the opportunity to earn allowed return on those costs. So.
In this case when we did the numbers and ran the numbers for.
Washington, Oregon and Idaho.
In all other cases, we filed the case, except for Idaho natural gas.
Okay. So that when you filed a notice of intent you weren't sure where you were expanding we had specifically we had to run the numbers and get the allocations between Washington, and Idaho, So, but we have to file that notice of intent. So we have the ability to file a rate case to have the ability to get recovery.
By January one to be efficient.
Right got just.
Also is it possible to give any color on the Oregon settlement prior to its filing.
No I mean other than saying we filed that the parties have reached an agreement in principle, all the parties and until.
That's filed with the commission, we're not going to provide that we expect that this month. So we were not making your way too long.
Okay. Thanks for the details appreciate it.
Thanks, Chris.
Thank you as a reminder, if you have any questions. Please press star one.
The next question comes from Andrew Levy from Exodus point.
Hi, guys.
Hi, Good morning question.
How are you.
Good.
Just on the 2% cost cap on this now familiar with that if you could just explain that that's my only question.
[noise].
Hi, This is Kevin Christie.
We have in the legislation that we saw passed in Washington to the extent that the utility is incurring costs related to complying with the legislation or the law.
If those costs exceed 2%, we can provide notice of a need to back off on the spending and compliance. If it has that kind of impact to customer rates and that is again specific to complying with energy legislation that clean legislation.
Okay. So I'm I'm, sorry, I'm, a little confused so you can raise their rates more than 2%, but if.
<unk> costs.
Go up 2% you can ask for more is that what you're saying.
If costs go up by more than 2%.
I E., we're having a difficult time compliant at 2% or less and we can file with the commission to not move forward with the additional spending.
Oh, the Catholic Capex.
Yes.
Or if the cost related so.
Okay.
So so.
But thats just for renewable that's not overall, though right, yes, correct for the clean legislation.
Right. Okay. So it's just for the clean legislation I got it okay. Good. Thank you very much.
Thanks, Andy.
[noise] Michel will fix this woman we show no further questions do you have any final comments.
Yes, I want to thank everyone for joining us today, we certainly appreciate your interest in our company have a great day.
Thank you.
Ladies and gentlemen. This concludes today's conference. We thank you for participating you may now disconnect.