Welcome to the Avista Corporation Second Quarter 2019 Earnings Conference Call. My name is Hilda, and I will be your operator for today. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer Please note that this conference is being recorded. I will now turn the call over to Mr.
John Wilcox. Mr. Wilcox, you may begin.
Thanks, Hilda. Good morning, everyone, and welcome to Avista's Q2 2019 earnings conference call. Our earnings were released pre market this morning and are available on our website. Joining me this morning are Avista Corp. Chairman of the Board and CEO, Scott Morris Avista Corp.
President, Dennis Vermillion Senior Vice President and CFO, Mark Fies Vice President, External Affairs and Chief Customer Officer, Kevin Christie and Vice President and Controller, Ryan Krasil. I would like to remind everyone that some of the 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 in today's call, please refer to our 10 ks for 2018 and 10 Q for the Q2 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 Q2 of 2019 were $0.38 per diluted share compared to $0.39 for the Q2 of 2018.
For the year to date, consolidated earnings were $2.14 per diluted share for 20.19 compared to $1.22 last year. Now I'll 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 1, 2020, and Dennis Vermillion will be taking over as CEO on October 1, 2019. I've been honored to lead this company and serve alongside exceptional and dedicated employees for nearly 40 years. I'm incredibly proud of what we've accomplished together and look forward to continuing my service on the Avista Board as this company continues to achieve great outcomes for those it serve. We've been diligent and deliberate in the succession planning of our company over the years, and I have every confidence in Dennis as the next CEO and his ability to successfully lead Avista 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 Avista's 130th birthday. To mark this historic event, Avista made a commitment of $7,000,000 to fund initiatives that strengthen our local communities. This major philanthropic contribution is the latest example of Avista's long rich tradition of championing the communities we serve. For decades, we've worked side by side with our community members to make the places where we live better, stronger and more resilient.
We'll infuse $7,000,000 into our communities over the next 3 years. It's earmarked to focus on 3 initiatives. First, homelessness. We know communities both large and small face this complex issue, and Vista wants to help find solutions. 2nd, small town pride.
We want to strengthen communities by solving tough problems, building resilience and continuing to care for our neighbors. And 3rd, youth success. We recognize that today's youth face many challenges, and that's why we're investing in initiatives that will set our youth on an exciting path for their 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 the donation commitment that I just spoke about. AEL and P was slightly above our expectations and expected to meet our full year guidance. At our other businesses, we completed the sale of our subsidiary, Metal FX, in the 2nd quarter, which resulted in about a $2,300,000 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 $0.05 per diluted share to a consolidated range of $2.83 to $3.03 per diluted share. This includes $1.01 per diluted share for the termination fee received from Hydro 1 in the Q1, which was partially offset by the payment of remaining transaction costs. We're raising earnings guidance due to the gain of the sale of MetalFX and earnings from investments at our other businesses. And now I am going to turn it over to Mark.
Thank you, Scott. Good morning, everyone. I want everybody to mark October 4 on their calendars as the Blackhawks open in the Czech Republic against the Philadelphia Flyers. It's a good day to get on your calendars early. For the Q2 of 2019, Avista Utilities contributed $0.32 per diluted share compared to $0.37 last year.
And on a year to date basis, we've contributed Vista Utilities has contributed $2.02 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. And these increases were offset by transaction costs associated with Hydro One in that payment and then increased transmission and distribution O and M the donation commitment that Scott mentioned earlier. The in Washington was a pretax benefit of $6,000,000 in the second quarter compared to a benefit of $1,000,000 in the Q2 of 'eighteen. Year to date, we've recognized a benefit of $3,500,000 compared to a $5,800,000 benefit in 2018.
We continue to be committed to investing the necessary capital in our utility infrastructure and we expect Avista Utilities to have an increased capital expenditure of $435,000,000 and the $30,000,000 increase results primarily from additional capital expenditures for a renewable integration for a wind project and additional customer growth. As of June 30, we have $212,000,000 of available liquidity under our credit facilities, and we expect to issue approximately $180,000,000 of long term debt and up to $65,000,000 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 $30,000,000 higher capital. As Scott mentioned earlier, we're raising our guidance to a consolidated range of $2.83 to $3.03 per diluted share, which is a $0.05 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 metal 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 Q2. Going forward, we continue to strive to reduce the regulatory timing lag and more closely align our earned returns with those authorized by 2022. To achieve this, we anticipate annual earnings growth of 9% to 10% from 2020 through 2022 with a return to normal 4% to 5% growth following 2022. And the earnings growth is calculated based on the midpoint of our original 2019 earnings guidance as a starting point, but also excluding the $1.01 termination payment from Hydro 1. 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 file.
We expect Avista Utilities to contribute in the range of $2.72 to $2.86 per diluted share, again, including the $1.01 transaction cost. The midpoint of our guidance does not include any expense or benefit under the IRR. We currently expect that to be in the 70 5.25 sharing band, which is expected to add approximately $0.05 per diluted share. Our outlook for Avista Utilities assumes, among other variables, normal precipitation, temperatures and below normal hydroelectric generation for the remainder of the year. We're about 90% of hydro in our expectation for this year, so we do include that in our expectations.
For 2019, we expect AEL and P to contribute in the range of $0.09 to $0.13 per diluted share, and our outlook there again assumes, among other variables, normal precipitation and hydroelectric generation for the remainder of the year. The change in our guidance is we expect our other businesses to contribute earnings in the range of $0.02 to $0.04 per diluted share, an increase from $0.05 from previous guidance and again due to the gain on MetalFX 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. We have a question from Richard Ciccarelli from Bank of America Merrill Lynch.
Lynch.
Just wanted to touch on feedback or sticking points thus far, and maybe specifically around the 2% cost cap?
Hi, this is Kevin Christie. Thanks for the question. The workshop really was a procedural workshop, and we didn't get into any of the details at that level, specifically the
2%. Okay. So no initial feedback in general thus far, though?
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 sale. And your other business, you raised it to $0.02 to $0.04 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 been historically or is there anything else to kind of
The big change is due to the gain. So yes, you wouldn't expect a gain in the future of that. So that would be stripped out and 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 successful in some of their early investments and we continue to invest there. So but you are correct.
You strip that out and going forward, 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.
Good morning, Paul.
So just to follow-up on that, I guess, in terms of these investments, so you're not really expecting how should we think in general about this business? I guess, you see the track basically going back to a loss. Is that what you're saying? And this is just sort of a one time gain or is this sort of some portfolio management that we should be thinking about in terms of this business?
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 and they're some of it's community development and we have small losses, very small losses and we did have a gain on this one. And Metal FX is a legacy company. We've owned that for a very long time and exited with a gain. So it will revert to a small loss, but over time, 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. It's generally less than a nickel share in our guidance. We expect that 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 2. 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 will probably revert to a small loss.
Okay. And then just in the release, there was discussion about the effective tax rate being negative 7.5 percent and 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 just sort of how it dovetails into the settlement, in other words, sort of the earnings impact associated with this, if it is any? And then just in general, what the normalized what the tax rate you see for 2019 and just sort of your thinking about the tax rate in 2020 beyond?
Well, I think the normalized tax rate we expect to see for the year is about 16%. So we did have some unusual things occur in the second quarter and they were offsetting some depreciation changes. So overall, the statutory rate is at 21 percent. We have small state taxes in certain other states we have. We expect it 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 what's going on there? In other words, did it have any earnings impact outside of this? It sounds like it was associated with the Cold Strip deal and I apologize for not being on top of it, but could you just elaborate a little bit more what happened there?
Well, so yes, we were offsetting additional depreciation at Colstrip. So really it had no earnings impact.
Okay. And just in general, we should be thinking 16% to 17%, roughly speaking, on a normalized basis going forward?
Yes.
Okay. Thanks so much guys.
Thank you, Paul.
Next question comes from Sophie Karp from KeyBanc. Hi. Good morning, guys. Can you hear me?
All good. Sophie, if you could I don't know if you need to move closer or something, we can barely hear you.
Is this better?
Better.
Great. Thank you. Thanks for taking my question. So just real quick, obviously, this year, there's been a little bit of a noise in the numbers and you had the fee that you booked from the merger and then you have the gain on sale of this business. Could you maybe just 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 it have been without those items? And maybe versus
your guidance. If you take out the $1 is the termination fee net of any costs associated with the termination fee. So you would take that out of the consolidated guidance and the utility guidance. And then you would also again, we raised guidance a nickel a share largely due to the gain on metal FX and other earnings. So I would say just for ease of calculation, if you took out a nickel on the other, that would get you back to kind of a baseline.
And then again, we do expect to have the higher growth 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 percent growth off of the midpoint of our original guidance and that takes off the $1 termination fee.
So $1.01 and the $0.05 from METALEX?
Well, it depends. If you're taking original guidance, you don't have to do the $0.05 If you take today's guidance, you do the $0.05 as well.
Got you. Thank you.
The next question comes from Vedula Murti from Avon Capital.
Good morning.
Hi Vedula.
Just want to make sure I understood the answer to Paul Patterson's question. With the what you're saying is that the negative 7.5 percent tax rate is associated with much higher depreciation expense such that if we go forward into the 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 in the future, again, will be impacted. I mean, you will have some offset with the taxes in the 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 were doing a little catch up. Don't even think about it for the future. It's going to be offsetting any additional depreciation accelerating that to 2025.
So at this point, the taxes, it's this quarter that has the impact, and we'll provide our guidance for the future stands is what we've said. I'm not going to get into details of every line item event. It does not affect our guidance going forward.
Okay. In terms of the contribution that was made, the $7,000,000 should we consider that as a one time type of item? Or is this something that periodically over every few years or something like that as part of your community activities occurs. If you can just help me think about that a little bit because just reading the release, it did strike me as kind of as a one time item that I shouldn't be perpetuating in any material fashion?
No, the $7,000,000 was a reflection of our 130th anniversary and we wanted to do something unique and impactful for the communities that we serve. That was a one time contribution. In addition, though we do have around $2,000,000 a year that we do philanthropically, but we've done that really for the last 20 years. So that one time $7,000,000 is a unique contribution.
So it would be appropriate to offer an ongoing basis to at least remove that
$7,000,000 Yes. Okay.
Thank you very much.
Thank you, Vedula.
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?
Very small and it's really just certain of the investments we have. There's a number of them that kind of go both ways. They have valuations that increase or decrease and recently we are starting to see more increases as we focus our strategy there. Historically, we've had losses there. But it's a very small number, Chris.
So a penny or 2 maybe at this point. So I don't really want to overstress that amount. We had the gain, that was the biggest driver and we have got some small increases on the other investments. We do expect that to increase as we go through time, but currently it's not expected to be very large.
Okay. And I'm a little bit confused on the contribution. Was the full $7,000,000 in the quarter? I thought Scott had said that would be over a 3 year period.
Well, the cash impact will be over 3 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, I'm 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 didn't file a case needing additional earnings or recovery of costs. So that would be our view on that. We only file an electric only in Idaho.
Yes. 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 I just wanted to check and make sure
That's correct, Chris.
Your thought process had 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, 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 to have the opportunity to earn a lot of 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 a case except for Idaho Natural Gas.
Okay. So that when you filed the notice of intent, you weren't sure where
you were expecting it?
We didn't know if we had it specifically. We had to run the numbers and get the allocations between Washington and Idaho. 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 1 to be efficient.
Right. Got you. Also, is it possible to give any color on the Oregon settlement prior to its filing?
No. Other than saying we filed it, the parties have reached an agreement in principle, all the parties. And until that's filed with the commission, we are not going to provide that. We expect that this month. So we are not making you wait too long.
Okay. Thanks for the details. Appreciate it. Thanks Chris.
Thank you. The next question comes from Andrew Levi from ExodusPoint.
Hi, guys. Just having a quick question. How are you? Good.
Just on the 2% cost cap, I'm just not familiar with that. If you could just explain that. That's my only question.
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 the energy legislation, the clean legislation.
Okay. So I'm sorry, I'm just a little confused. So you can raise your rates more than 2%, but if 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 complying at 2% or less, then we can file with the commission to not move forward with the additional spending.
Like CapEx?
Yes, CapEx
or if the costs are related
to the EBITDA.
But that's 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.
Mr. Wilcox, at this moment, 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.