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 the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I will 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 Thies, Senior Vice President, External Affairs and Chief Customer Officer, Kevin Christie, and Vice President, Controller and Principal Accounting Officer, Ryan Krasselt. I would like to remind everyone that some of the statements that we've 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 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 were $0.20 per diluted share, compared to $0.26 for the second quarter of 2020. For the year- to- date, consolidated earnings were $1.18 per diluted share for 2021, compared to $0.98 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 lifted most of the remaining restrictions that had 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-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 cost 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, Avista 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 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. A dry-land 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 the 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.
Avista 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-$2.16 per diluted share.
While we are confirming our consolidated range, we are adjusting our 2021 segment ranges to lower Avista Utilities by $0.10 per diluted share and raise Other by $0.10 per diluted share. For 2022, we are lowering consolidated earnings guidance by $0.15 per diluted share to a range of $2.03-$2.23 per diluted share. For 2023, we are confirming our earnings guidance with a consolidated range of $2.42-$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. Good morning, everybody. I know everybody's sitting on the edge of their seat 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. 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 2021 and also 2022, and confirming 2023 consolidated guidance. Our guidance, I want to spend a little time on that. Our guidance assume, among other things, a 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 Avista Utilities to contribute in the range of $1.83-$1.97 per diluted share.
The lowering of our guidance in 2021 and 2022 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. 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 2022, 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 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 in the upper half of the guidance range. Our current expectation for the ERM 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 ERM 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 AEL&P to contribute $0.08-$0.11.
We increased the range in our other businesses by $0.10, which really offsets the utility reduction, and that's largely due to a range of $0.05-$0.08 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 non-recurring items until the effects are known and certain. Moving on to earnings for the second quarter. Avista Utilities contributed $0.11 per diluted share compared to $0.26 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's about 91% of our expectations or normal for this year. The ERM in Washington also moved significantly, had a pre-tax expense of $7.6 million in the second quarter of 2021, compared to a pre-tax benefit of $0.4 million in 2020. Year- to- date, we've recognized $3.3 million of expense in 2021 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 are 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 in necessary capital in our utility infrastructure. We currently expect Avista 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 million and $40 million increase in 2021, 2022, and 2023. $40 million in 2023 as well. 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 and common stock is to fund the increased capital expenditures. I'll now turn the call back over to John.
Thank you. 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. Your first question comes from the line of Julien Dumoulin-Smith of Bank of America.
Hey. How's it going, everyone? It's actually Kody Clark on for Julien.
Morning, Kody.
Hi, Kody.
A couple of questions here. I guess first on the guidance reduction in 2022. I am wondering if there is anything else that is 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 is kind of contributing to that dynamic? Are you seeing any increased insurance costs just on the wildfire side?
Well, there's some other nominal costs. We really highlighted the big drivers. There are some other nominal costs on O&M, 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. 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. No, we continue to expect a fair outcome in our current Washington case.
Right. Okay.
It is largely additional capital due to growth and depreciation. There is some other small things.
Okay.
That's the main driver.
Got it. Then just on 2023 guidance, I guess all else equal, you're investing more in 2021 and 2022, then you're going to file that case in early 2022. You kind of reaffirmed that guidance range for 2023 and also stated that you're still assuming that you're going to get to your authorized in 2023. I'm just kind of wondering what's contributing to your reaffirmation of that 2023 guidance range. I guess, from my perspective, it should be a little bit higher. But-
Well, it wasn't a significant move. The capital assets over long lives have some impact, but it's not a significant impact. We're still within the range. Rather than have the nuance of moving it a few cents, we just said we maintained our range. We want to have the confidence that we expect to get back to earning our allowed return on the capital that we deploy. That'll 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 2023.
Got it. Okay. I'll pass it off and jump back in the queue. Thanks.
Thanks, Kody.
Your next question comes from the line of Sophie Karp from KeyBanc.
Hi. Good morning. Thanks for taking my question.
Morning, Sophie.
Hi, Sophie.
Morning. Hey. Maybe to build on the previous question a little bit here. You're talking about increased regulatory lag that's partially due to higher CapEx, I suppose, in 2022. Are you correspondingly increasing your CapEx outlook? Maybe I'm missing it here somewhere.
We are increasing our CapEx outlook. Is that your question? That is impacting our-
Yes.
Yes. We are increasing our CapEx outlook. We're going to go to $450 million for this year and $445 million for 2022 and 2023. That compares to $415 million previously and $405 million. 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. 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. Okay. That's a very helpful color. Could you maybe give us a little bit more color on the revision guidance revision on the other segments this year for 2021? If that goes from -$5 million to -$2 million to $5 million to $8 million. A little bit more color on what accounts to 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 we're in with the Energy Impact Partners and also the sale of Steam Plant. We had a small gain on the sale of Steam Plant Square as well. That's really booked into our actual results. We just look at that forward. We're not expecting more significant gains. It's really based on the actual results we had in the quarter.
Yeah. Do you disclose what you have in those funds? Is it kind of similar to energy venture capital that some of your peers have?
I don't know what the peers are invested in particularly, no, we don't disclose what the particular investments of the fund are, just that we have invested in fund one and fund two, we committed $25 million to each fund. We are investing in those funds continuously. We expect to invest about $15 million in our other businesses in 2021 and I believe also in 2022. Yes.
Got it. Okay. Before I pass it on, maybe on the power supply situation, clearly understand the hydro was an issue. How do you think this is going to stack up in the second half? Is hydro going to become less of a factor in the second half? Maybe if you can give us some color on that and also remind us how the PCA mechanism kicks in here.
When we do our estimates for, excuse me, we said $0.08 negative surcharge positions. That is for the year. 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. We do expect normal hydro conditions for the rest of the fall and into the winter. That could have some variability, but most of the variability typically, again, occurs in runoff. 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 at 91% for the year. It's about 50 MW average for the year is what the impact is.
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. Your ability to recover those costs is basically limited by the rate structure there, correct?
Well, the ERM is what our power supply cost is. If the cost of natural gas and our loads and our hydro changes, that would change. We're in the 90/10 right now.
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 Vedula Murti from Hudson Bay Capital.
Good morning.
Morning, Vedula. How are you?
I am okay. A couple of things. I guess one, in terms of 2022, you've indicated about depreciation and regulatory relief, but you also referenced power costs. Is there like an ERM negative that you're incorporating for 2022 that we ought to be aware of?
The power costs actually reset in our rate cases. When we come out and give 2022 guidance, we will put that expectation in. 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. 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 2022 expectations.
So that-
We'll provide that .
Okay. It should be fair to say then that the revision downward for 2022 really is not tied to power cost at all. It's more tied to 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 and capital.
Okay. In terms of equity, you're up to 90% there. I hear you've done, was it 16%, such that there's 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, we were at 50% on an annual basis, kind of every year going forward. Is now 90s the new number?
We've been in the $50 million-$75 million on average over the past several years. I don't remember the exact numbers. It'll depend on the cash flows that we have, because it's also operating cash flows help offset our needs for equity. We'll be in our normal ranges, adjusted for the additional CapEx. If you just assumed, a good assumption would probably be if you assume 50/50 on the additional $40 million going forward, it's an additional $20 million to our historical levels. I don't know that we necessarily get to $90 million, but we could. We'll have to look at that, and we issue that guidance when we come out in future years.
Okay, I guess that you would still be kind of in a range where needing to do any type of a block or a public type 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. As I recalled, in the past when the discussions come up about increasing CapEx and dealing with 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 there's pressure there because that's a little counter to what I recall previous discussions over the last, say, 18, 24 months.
We've been at the $405 million level for many years. I don't know, it's eight or nine years. I don't remember the exact year we went up. We've been at that level for a long time. Given that, we looked at it and said, we just came out, as Dennis mentioned, with our new Wildfire Resiliency Plan. That added some capital we need to spend over the next 10 years in that plan. We had our plan consistently for a long time. We decided, and growth capital has gone up as we continue to add customers, and we're joining the Energy Imbalance Market as well. There's a number of different needs outside of our regular capital needs 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 and affordability to our customers. We've identified that if you look at our regulatory filings, over $500 million of projects we could spend money on every year. As we have these new things added to that, we still try to maintain our capital at a prudent level, but felt now is the time to move up to the $445 million in the next few years.
With the 1Q 2022 rate filing, can you talk a little bit about the multiyear 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 multiyear rate plan. It can be as few as two years and as many as four years. In that legislation that moved forward the ability to have the multiyear or the requirement to have the multiyear 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. 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 we'll file.
Some of all of this depends on the outcome of the current case, which Mark described. We expect an order here before October 1. 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.
One last question. Can you remind me, 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. I'm trying to recall whether it's about 70 basis points or something like that that's been a consistent policy of regulation for you in Washington.
You're spot on, Vedula. It is 70 basis points is our expectation there. It's really largely costs that are not allowed to be recovered 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. We do have another question from the line of Julien Dumoulin-Smith.
Hey, Kody here again. Just a couple of very quick follow-ups.
Hey, Kody.
Just wondering if you could share what you're assuming in terms of earned ROE for 2021. 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. We're low on our utility guidance $0.10. I don't have that. It is lower than $0.70. You can do the math.
Got it.
If you want.
Got it.
Yeah. Got it. Just wondering if there's any updates on the claims from the DNR on the Babb Road Fire. Any updates from when we last spoke?
Yeah. This is Dennis. Yeah, really no updates on that. We're continuing to engage with the Department of Natural Resources constructively. We've had a few minor claims, but nothing material. 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.
Got it. Okay.
Nothing new from what we've talked about in the past.
Okay. Are there any fires in your service territory now that we should be aware of?
Yeah. As you can tell by watching the nightly news, if you do that, there's fires all over the Northwest, and there's been a few in and around our service area. Nothing that is material at this point. At this time, no concerns. Obviously, as I mentioned earlier, it's really peak fire season, and 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. The short answer is really nothing material at this point.
The ones, Kody, to add to what Dennis is saying, the ones that have started, 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, Kody.
You do have another question from the line of Vedula Murti.
In terms of the reaffirmation of 2023, can you remind us in terms of that range, what the earned ROE was assumed to be in that period?
We're getting to our allowed ROE minus the 70 basis points. We're allowed about 9.4% in our jurisdictions. Idaho is still pending commission approval, 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'd be about 8.7% from an ROE perspective.
Thank you very much.
Thanks, Vedula.
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.