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 session. During the question and answer session, if you have a question, please press star then one on your touchtone phone. 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 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 Avista Corp Chairman of the Board and CEO, Scott Morris, Avista Corp President, Dennis Vermillion, Senior Vice President and CFO, Mark Thies, Vice President, 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 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 of 2019 were $0.38 per diluted share, compared to $0.39 for the second quarter of 2018. For the year-to-date, consolidated earnings were $2.14 per diluted share for 2019, 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 1st, 2020, and Dennis Vermillion will be taking over as CEO on October 1st, 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 serves. 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 million 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 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 Avista wants to help find solutions. Second, small town pride.
We want to strengthen communities by solving tough problems, building resilience, and continuing to care for our neighbors. Third, 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&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, METALfx, in the second quarter, which resulted in about a $2.3 million gain. 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. We expect to file this agreement later in August. In June, we filed an electric general rate case in Idaho. 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-$3.03 per diluted share. This includes $1.01 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 METALfx and earnings from investments at our other businesses. 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 calendars as the Blackhawks open in the Czech Republic against the Philadelphia Flyers. It's a good date to get on your calendars early. For the second quarter of 2019, Avista Utilities contributed $0.32 per diluted share, compared to $0.37 last year. On a year-to-date basis, Avista 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. These increases were offset by transaction costs associated with Hydro One and that payment, and then increased transmission and distribution O&M, and the donation commitment that Scott mentioned earlier.
The ERM in 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 2018. Year to date, we've recognized the benefit of $3.5 million, compared to a $5.8 million benefit in 2018. We continue to be committed to investing the necessary capital in our utility infrastructure, we expect Avista Utilities to have an increased capital expenditure of $435 million. The $30 million increase results primarily from additional capital expenditures for renewable integration for a wind project and additional customer growth.
As of June 30th, we have $212 million of available liquidity under our credit facilities. 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, maintain an appropriate capital structure. This does represent an increase, as I mentioned, with the $30 million 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. That increase includes the termination fee paid to Hydro One and the payment of transaction costs. We're raising the guidance primarily because the gain on METALfx 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 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%-10% from 2020 through 2022, with a return to normal 4%-5% growth following 2022. The earnings growth is calculated based on the midpoint of our original 2019 earnings guidance as a starting point, but also excluding the $1 termination payment from Hydro One. These growth rates, really, the only way we achieve those is 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-$2.86 per diluted share, again, including the $1 transaction cost. The midpoint of our guidance does not include any expense or benefit under the ERM. We currently expect that to be in the 75/25 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&P to contribute in the range of $0.09-$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-$0.04 per diluted share, an increase of $0.05 from previous guidance. 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.
Now we will open this call for questions.
Thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or hash key. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press star and then one on your touch tone phone. We have a question from Richard Ciciarelli from Bank of America Merrill Lynch.
Hey, morning. Can you hear me?
Good morning. Yes, we can hear you.
All right, great. Just wanted to touch on the recently acted Washington legislation. I know the commission recently held a workshop on its implementation. Just curious if any 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. We didn't get into any of the details at that level, specifically the 2%.
Okay. 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. Separately, you raised your guidance here largely on the METALfx sale. Your other business, you raised it to $0.02-$0.04 from a loss. 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 consider?
The big change is due to the gain. Yeah, you wouldn't expect a gain in the future of that. 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. You are correct. You strip that out, and going forward, 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 to follow up on that, I guess. In terms of these investments, 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 there sort of some portfolio management that we should be thinking about in terms of this business?
This is a very small piece of our business at times, and we invest in these investments. Many of them are in our local communities, and some of it's community development, and we have small losses, very small losses. We did have a gain on this one. METALfx is a legacy company. We've owned that for a very long time and exited with a gain. 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 $0.05 share in our guidance. We expect that to continue if there was a loss. We do expect as we move forward to generate gains through these investments that we're making today.
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. 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. Just in the release, there was discussion about the effective tax rate being negative 7.5%, and it seems that it's related to the settlement. I apologize, could you just elaborate a little bit more exactly what is going on with the tax rate? Just sort of how it dovetails into the settlement, in other words, sort of the earnings impact associated with this, if it is any. Just in general, what 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 year is about 16%. We did have some unusual things occur in the second quarter, and they were offsetting some depreciation changes. Overall, the statutory rate's at 21%. We have some small state taxes in certain other states we have. We expect it probably to be in the 16%-17% range as an effective tax rate over time.
Okay. The negative 7.5%, could you just elaborate a little bit what's going on there? In other words, did it have any earnings impact outside of the It sounds like it was associated with the Colstrip deal, and I apologize for not being on top of it, but could you just elaborate a little bit more what happened there?
Yeah. Well, yes, we were offsetting additional depreciation at Colstrip, so really it had no earnings impact.
Okay. Just in general, we should be thinking 16%-17%, 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. Can you hear me?
All good. Sophie, I don't know if you need to move closer or something. We can barely hear you.
Oh, is this better?
Better.
Great. Thank you. Thanks for taking my question. 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? What would it have been without those items in the adjusted items?
You take out the $1 is the termination fee net of any costs associated with the termination fee. You would take that out of the consolidated guidance and the utility guidance. You would also, again, we raised guidance a share largely due to the gain on METALfx and other earnings. I would say just for ease of calculation, if you took out $0.05 on the other, that would get you back to kind of a baseline. Again, we do expect to have the higher growth as we trend towards getting back to earning our allowed return by 2022.
In 2020, we would expect to have that 9%-10% growth off of the midpoint of our original guidance. That takes off the $1 termination fee.
$1 and the $0.05 from METALfx.
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.
Gotcha. Thank you.
The next question comes from Vedula Murti from Aven Capital.
Hello, good morning.
Hi, Vedula.
Just want to make sure I understood the answer to Paul Patterson's question. What you're saying is that the negative 7.5% tax rate is associated with much higher depreciation expense, such that if we go forward into the future, say, 2020, when 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. 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. Don't even think about it for the future. It's going to be offsetting any additional depreciation accelerating that to 2025. At this point, the taxes, it's this quarter that has the impact, and our guidance for the future stands as 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 million, 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 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.
The $7 million 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 million a year that we do philanthropically, but we've done that really for the last 20 years. That one-time $7 million is a unique contribution.
It would be appropriate to offer an ongoing basis to at least remove that $seven million?
Yes.
Okay. Thank you very much.
Thank you, Vedula.
The next question comes from Chris Ellinghaus from Williams Capital.
Hey, guys. Good morning.
Morning, Chris.
Can you give us any more color on the other non-regulated income that you discussed in the press release? If you can you give us any kind of number on that?
Very small, it's really just certain of the investments that we have. There's a number of them that kind of go both ways. They have valuations that increase or decrease. Recently we're starting to see more increases as we focus our strategy there. Historically, we've had losses there. It's a very small number, Chris, so $0.01 or $0.02 maybe at this point. I don't really want to overstress 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's not expected to be very large.
Okay. I'm a little bit confused on the contribution. Was the full $7 million in the quarter? I thought Scott had said that would be over a three-year period.
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. We took the expense in the quarter.
Okay. Based on the Idaho filings, can you give us a sense of what your thoughts are on what the gas business in Idaho is going to earn this year? I'm sorry.
We did not file a gas case in Idaho. 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. 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. 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, we don't file a case. 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 an allowed return on those costs. 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. 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. 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. Gotcha. Also, is it possible to give any color on the Oregon settlement prior to its filings?
No. Other than saying we filed it, the parties have reached an agreement in principle, all the parties. Until that's filed with the commission, we're not going to provide that. We expect that this month, we're not making you wait 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 ExodusPoint.
Hi, guys. Just have a quick question.
Morning, Andy.
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. That is, again, specific to complying with the energy legislation, the clean legislation.
I'm sorry, I'm just a little confused. 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.
You mean like CapEx?
Yes, CapEx. If the costs are related to the EPA.
That's just for renewable. That's not overall, though, right?
Yeah. Correct. For the clean legislation.
Right. Okay. 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.