Ladies and gentlemen, thank you for standing by, and welcome to Avista Corporation Q1 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would like to turn the conference over to your host, Ms. Stacey Wenz. Please go ahead.
Good morning, everyone. Welcome to Avista's First Quarter 2022 Earnings Conference C all. Our earnings and our first quarter 10-Q were released pre-market this morning. Both 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. 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-K for 2021 and 10-Q for the first quarter of 2022, which are available on our website.
I'll begin by recapping the financial results presented in today's press release. Our consolidated earnings for the first quarter of 2022 were $0.99 per diluted share compared to $0.98 for the first quarter of 2021. Now, I'll turn the discussion over to Dennis.
Well, thanks, Stacey, and good morning, everyone. You know, we had a real solid start to 2022 as Avista Utilities earnings were above our expectations, and we are pleased with the results of the first quarter. Our performance was partially the result of the timing of certain expenses, and for the remainder of 2022, we anticipate seeing higher costs based upon current economic environment. However, as we always do, we are proactively managing these issues, and we are on track to meet our consolidated earnings targets for the full year. You know, not unlike what other companies are seeing, some of these challenges that we're seeing include higher inflation than in the recent past.
We have increased interest rates, commodity costs that are higher than we've seen in almost 15 years, and some supply chain constraints and competitive labor markets, and of course, a lingering pandemic which, you know, thankfully looks like we're on the tail end of that. We're all real happy about that, obviously. All these are contributing to a difficult operating environment. To address some of these issues, we do expect to update our authorized power supply cost towards the end of 2022 through our pending Washington Electric General Rate Case, as well as interest costs and other changes in costs in the current and future rate cases. As always, cost management efforts are also fundamental to achieving our results.
In addition, as you may have seen, we recently filed out-of-cycle purchase gas adjustments, or PGAs, in Washington and Idaho to adjust customer commodity rates to take into account the rising cost of natural gas. I'm pleased with our continued progress towards achieving our clean energy goals. In March, we entered the Western Energy Imbalance Market, or EIM, which really expands our ability to share renewable resources across the regional market to help reduce costs to our customers all while continuing to meet their needs going forward. We also introduced a voluntary renewable natural gas program in Washington that allows customers to opt in and offset their natural gas usage with RNG for as little as $5 a month.
In March, we were recognized for the third consecutive year by Ethisphere as one of the world's most ethical companies in 2022. We were only one of nine honorees in the energy and utilities industry, and we are honored to receive this significant recognition yet again, which acknowledges our company's rich history of corporate responsibility that spans more than 130 years. We're really proud to win this award for the third time. With respect to rate cases and regulatory filings in March, we settled our Oregon general rate case, and if approved, we would expect new rates to be effective in August. We are still awaiting the regulatory process in Washington and expect rate recovery towards the end of 2022.
In Idaho, we expect to file rate cases in the first quarter of 2023. Then finally, in Alaska, we expect to file a rate case by August 30 of this year. We are confirming our 2022 earnings guidance with a consolidated range of $1.93-$2.13. We expect to be at the lower end of this range, primarily due to higher power supply costs, and we are confirming our 2023 consolidated earnings guidance range of $2.42-$2.62 per diluted share. With that, I will turn this presentation over to Mark.
Thank you, Dennis. Good morning, everyone. Two good things happened in the first quarter. Like Dennis said, we had a good quarter, and secondly, the Blackhawks' pain ended. The season ended, and we did not make the playoffs, so when you're turning on your TV to watch hockey, you won't see them. For the first quarter, Avista Utilities contributed $0.93 per share, as Dennis said, compared to $0.92 last year. This was above our expectations, partially due to timing, but some of it we just had a better quarter. Compared to the first quarter, our increases were due primarily to completed rate cases in Washington and Idaho, effective in late 2021. The benefits from those rate cases, historically, those benefits come through gross margin in the revenue line.
Because of our the tax customer credit that we're trying to keep the bills lower, that the benefit of that gets recorded through income taxes. So you see a higher income tax benefit, and that will continue going forward as we have that credit offsetting our customer bills, which was important to us in that process. We also have in our customer growth, we're in line, but we're about 1.5%. I know others have strong. That's strong for us. We expect 1%, 1.5%. We're just over that in the first quarter, and we see good customer growth as we go forward. We do, as Dennis mentioned, have some headwinds. We have higher power supply costs.
Gas prices are really getting impacted primarily by the conflict, and in part by the conflict in Russia and Ukraine. We've seen higher gas prices, which causes us to have higher power supply costs, which is a negative, which is why, as Dennis mentioned, the ERM is as we forecasted. In the first quarter, it wasn't so bad. As we forecasted, it is going to be higher, impacting us. We also have some higher depreciation and O&M costs. The ERM, as I mentioned in Washington, was a benefit in the first quarter of $1.9 million compared to $4.3 million benefit in the prior year. As I mentioned, we do expect that to be turned around and be in the expense position in the 90% customer, 10% company sharing band.
As we continue to grow our business and serve our customers, we continue to invest the capital in our utility infrastructure. We expect Avista Utilities CapEx to be about $445 million in each of 2022 and 2023. We expect AEL&P capital expenditures to be down slightly about $10 million from our previous estimate, and we expect in 2022. In 2023, we expect it to be $13 million. That's just due to the timing of receiving. Dennis mentioned some supply chain constraints. It's the timing of receiving some goods. That's a little bit of a challenge up in Alaska, and they've moved that capital out a few years, but they're still on track to make their numbers. We also in our other businesses expect to spend about $15 million in 2022 and $14 million in 2023.
With respect to liquidity, it looks odd to me on the balance sheet as we had a significant amount of cash, but we did issue $400 million in March, in late March, and we have $370 million of available liquidity on our credit facility, but we were doing that because we had an April first repayment of $250 million. As we look forward from today, we're back to normal liquidity, and we still have strong liquidity. We do expect to issue about $120 million of common stock in 2022, and that includes the $38 million that we issued in the first quarter. In 2023, we expect to issue $110 million of long-term debt and the same amount in common stock. Moving on to guidance.
We are confirming, as Dennis mentioned, we're confirming our 2022 consolidated guidance with a range of $1.93-$2.13. We expect to be at the lower end of that range, again, primarily due, almost all due to the ERM, which we expect to be about $0.09 negative in 2022. We are also confirming our 2023 guidance and our guidance of $2.42-$2.62 per diluted share. Our guidance assumes timely and appropriate rate relief in all of our jurisdictions. In addition to the rate relief, you know, we do have the 1%-1.5% customer growth annually, and we have the impact of inflation is included in our guidance.
As inflation has increased, it does put some pressure on us to continue, as Dennis mentioned, to manage our costs, which we expect to do. We do expect to seek, you know, 60 days prior to rates going into effect. We reforecast our power supply costs all as part of our regulatory process. We will be able to reforecast that as we look towards 2023 to get the power supply costs more in line with the markets. These increases we've seen today will impact us in 2022. We don't expect them to have the same impact in 2023. We will have to manage our costs as we go forward to address the inflationary pressures that we're seeing to achieve our expected results.
We expect Avista Utilities to contribute in the range of $1.81-$1.97 a share for 2022 and $2.30-$2.46 a share for 2023. As we give our ranges, the midpoint of our ranges don't include the impact of the ERM. As I mentioned, as we expect today, the ERM, what it was originally in our first guidance, $0.07, it's moved to $0.09 negative now. That does put us slightly outside of the utility range from the midpoint, and we're not gonna redo our ranges to cover that. We're still inside our range for consolidated. We may be slightly below for the utility. We expect AEL&P to contribute in the range of $0.08-$0.10 per diluted share, both 2022 and 2023.
We do expect them, as Dennis mentioned, to file a rate case. They're required to file a rate case in August of this year. That's incorporated into our guidance. Our outlook for Avista Utilities and AEL&P does assume, among other variables, normal precipitation and normal hydroelectric generation for the rest of the year. Our hydro right now is in a reasonable spot. We have about 110% of snowpack, and right now it's currently been cool, a cool spring. If we can get a long, cool spring, that does tend to benefit us as that brings the water off slowly. We expect our other businesses to be $0.04-$0.06 per share in 2022 and 2023. Our guidance, again, only includes normal operating conditions and doesn't include anything unusual or non-recurring until the effects are known and certain. I'll now turn the call back over to Stacey.
Thanks, Mark. We're open for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question comes from the line of Julien Dumoulin-Smith from Bank of America. Your line is open.
Hey, Dennis and Mark. It's actually Kody Clark on for Julien. Thanks for taking my questions.
Hi, Kody.
Kody, how are you?
Doing well. You talked a lot about the inflationary environment, and previously you pointed to just over 5% cost increases for 2022, and then kind of back to normal, the 2%-3% inflation in cost in 2023. How are your actuals trending versus that plan? I know you mentioned some expense timing. Maybe it would be helpful to get some more color on the drivers of that. Also just, you know, how are you thinking about the customer bill impact from these pressures in the ongoing and upcoming rate cases?
There's a lot there, so I'll start and then I'll let also Kevin to talk a little bit about the customer impact. From an inflationary perspective, you know, again, we had a good first quarter. We didn't see as significant of an impact there, but we do recognize that that's coming, and we have put that in our forecast. When we talked about the, you know, the impact, we did forecast, you know, 5% inflation, but that's over a broad cost basis. We haven't seen significantly higher than that as we look at our forecast. Now that could come. We've updated all of our interest rates to current interest rates. The Fed moves today. That could change that.
Where we are today, it's based on current interest rates going out, and we did our $400 million bond deal. All that's factored in to our forecast. Then, you know, we've gone through our union agreements on our wages. That's all incorporated. We have a brand-new union agreement. We've updated our wages for our employees. That factor is incorporated into our forecast already and was included in that 5% when it looks at costs that directly impact us. Some of the other costs we're seeing is, you know, trying to manage the cost of materials and supplies. That probably impacts capital more than it does O&M, but it does impact O&M to some level, and we've incorporated that.
To the extent inflation lingers longer and stays higher, we will have to work through that, and we'll work on either managing our costs or getting that into, you know, future regulatory proceedings. There could be some challenge there if it increases high in 2023 and we can't quite get the recovery as quickly. At this point, we believe that we can manage through that through managing our costs to offset the impacts of inflation. With the customer bill impact, I'll turn that to Kevin.
Hey, Kody, it's Kevin Christie. Thanks for the question. All I can really add to what Mark has said is that we provided the commission with an opportunity to use additional tax offset, customer tax credit offset. It wouldn't mitigate the full impact of the case, but it certainly would help out. The commission ultimately gets a chance to decide how to use that. They have used in the past, this last rate case effectively, and I think they would look at that in this instance. Again, inflationary pressures are tough from a customer perspective, but we're trying to give tools to help mitigate where we can.
Got it. Yeah, definitely understood. You gave some thoughts on the power backdrop and the move to the $0.09 impact from the ERM from the $0.07 prior. You also mentioned Snowpack being healthy, and that could be a driver to some of the offset of the drag. I'm curious if you have any views on how participation in EIM is playing into the ERM dynamic thus far. Have you included any benefits from participation there in that $0.09 figure?
Well, yes, but again, part of it is included in our expected power supply cost was an amount from our rate case. When we got that approved, we had an amount that we needed to achieve. I wanna say on a system-wide basis, I believe it was just over $5 million. Then when you back it down to Washington for the ERM, it was, you know, $3.5 million-$4 million. I don't remember the exact numbers, but that's already incorporated that we need to get to the expectations. We've seen, you know, in the, you know, we've been in it for a couple of months now. It's been, you know, at or better than our expectations, but not significantly enough, and we've incorporated some of that into the ERM.
When you're in the 90/10, even if we get, Cody, let's say we get some benefit additional, I'm using this as a hypothetical, if we got an additional $5 million of benefit where we are in the ERM at the $0.09, we would only get 10% of that. We get a half a million dollars as an example if we continued. That's just because of where we sit in the ERM. That doesn't take away from the great work that they're doing and the real benefit to our customer bills that we believe that will be, you know, in that market. Like Dennis said in his opening comments, you know, we're able to provide that energy. It benefits our customers and our company when, you know, when we're not in the 90/10.
Right. Got it. Okay. One last one, if I can just squeeze it in. Just on the other segment, I'm wondering if you have any additional detail on how we should be thinking about shaping that over the course of the year. I know your Edge pilot program is still early stages, so some drag there as it ramps, but anything else that you can point to would be helpful.
You know, unfortunately, I don't think I really have a great shaping for that, you know, from a perspective. It really depends. What we've seen is the investments that we have there, you know, have been, you know, consistently performing, and the market's been fairly strong. In the clean tech, you know, if we look at our investments through Energy Impact Partners, there's a number of things in clean tech and technology that, you know, has been strong. We expect that to continue to be strong, but there's nothing out there that says you shape it.
It's all based on individual company investments, and we can't shape it. We forecast over the course of the year, but from a quarterly shaping, we don't really spend a lot of time on that other than the fact, like you said, we may see a little bit of pressure and have that included in the first quarter and second quarter as we have the Edge pilot. That's not significant to move us at this point.
Okay. Understood. Thanks for the time. I'll jump back in the queue.
Thanks, Kody.
Thank you. Your next question comes from the line of Anthony Crowdell from Mizuho. Your line is open, sir.
Hey, good morning, Dennis. Good morning, Mark. Mark, I feel your pain on the Blackhawks, but you could be a Rangers fan and be very tired this morning.
Well, I was watching it. Fortunately, I'm three hours earlier than you. That was painful in the third overtime.
Yeah. I was fortunate enough to go, and I'm on my fourth Diet Coke this morning, so I'm struggling. Hope you guys could help. Just a couple quick questions, I guess. We look at the CapEx slide. I'm just wondering, you know, a lot of the other companies that have reported are mentioning some supply constraints, not just on renewables, but also on just some transformers, some core stuff that they're seeing in the business. Is there anything that really you think could impact your CapEx projections?
Well, I don't think it impacts necessarily our CapEx projections. It may impact the, you know, the timing of getting those done and the amount of work as costs. There is some inflationary cost pressures too on the goods, like you said, transformers and others, that, you know, we will spend our capital. We may not get as much done, but we will do the analysis to make sure that we're still economic to our customers with what we're doing, obviously. What we have seen, and Dennis mentioned it in his earlier comments, that there is some timing constraints there, and we've actually had to switch and look for additional suppliers. In transformers, that was one of those examples where we did get a new supplier. It's worked very well.
They are international, but we've vetted them, and we've done very well there. We're working very hard. Our you know, supply chain folks work very hard to make sure that we can get the goods necessary that we need. We may carry a little more inventory as well to be able to get our projects done. All of that is, you know. It's not negatively impacting our forecast as we look forward. They're working very hard. I don't wanna take anything away from that. you know, we believe we'll be able to source our equipment to do our capital projects. you know, the timing of our other projects, you know, it does push out the time to get it, but we've been successful at this point, and we expect that to continue.
Great. If I could switch gears. Obviously, rates have really, you know, gone up so far this year. I believe you guys have a $250 million bond coming due soon. Just if you could talk to us on what you're seeing, you know, rates for that to refi that.
Well, we did. We did refi it in the first quarter. We did $400 million in the first quarter, late March. You know, rates were up some. You know, and then also we've seen on the short-term side, as we borrow to manage working capital, rates are up some there. All that's incorporated into our forecast. We would expect to include that or look to include that as we go through our regulatory processes to update our capital structure for known and measurable items. I mean, we do have a known and measurable item with that $400 million bond deal that we think we can incorporate into our regulatory proceedings. Now, that does take commissions have to approve that, but we believe it's reasonable.
Got it. Just last for me, I'm just wondering your thoughts. I know that you already filed in January, you filed in Washington. You did a settlement in March. You know, Alaska, you're going to file. It seems that as rates have moved, I haven't seen, you know, management teams actually change their requested ROE. If you think about the move that we've seen in the 10-year, you know, since the beginning of the year, you have a reason, like the settlement in, you know, Oregon right now, 9.4 kind of is in line with what you're seeing in the national average. Yet, you know, Treasuries have almost doubled since the beginning of the year. Just as you think about the filing in Alaska going forward, could investors start to see maybe utilities ramping up the requested ROE because of the move in rates?
Well, you know, part of it, that's a great question, but part of it is a challenge in that we've seen rates over the last 10 years move down significantly, and ROEs have moved down somewhat. I don't think we're gonna be fast to raise up, and I don't think the commissions, at least in our jurisdictions, were fast to move down. We did incrementally move down as rates came down. We did. We went when I started, so 13 years ago, we were at 10.2 in Washington and Idaho, and now we're at 9.4. Rates from then probably went from Treasuries, I don't know, 6% or so or higher down to, you know, sub 2% for a while. I don't think while incrementally they are moving up, I don't think the commissions.
Now, you know, we would love it if they did, don't get me wrong, but I don't think they're gonna jump too quickly to move up when they didn't jump too quickly to move down. They're still looking at value to customers, and we'll have to see what that does. Kevin, I don't know if you'd add anything to that.
Yeah, just one quick item. In our Washington case, we did increase the request of an ROE of 10.25%, and we did that in recognition, and our witness spent a fair amount of time and detail around inflation and other factors that influenced us to ask for that 10.25. That's higher than what we've asked in the past, and in part is the tool available to the commission in this kind of environment where we have this uncertainty. We really wanted to make that available to them so they can move forward and work with us as we want to recover and earn our authorized return.
Great. Thanks so much for taking my questions. Hopefully, Mark, we have a better Thursday night.
I'll be watching.
Thank you. Your next question comes from the line of Brian Russo from Sidoti. Your line is open.
Hi, good morning.
Morning, Brian.
Hey, I just wanna understand kind of the seasonality of the ERM. You know, the $1+ million benefit in the first quarter. But yet, you're gonna be well above the baseline, i.e. in expense, you know, for the full year. What's the seasonality? I mean, if you have a little above normal hydro conditions and normal runoff, will most of that expense kinda hit in the fourth quarter when you have less hydro and you're in the market procuring power at higher prices? Is that kind of the way to look at it?
Well, I mean, the seasonality, yes, from a availability of supply perspective, assuming we have normal hydro, you know, we have a lot more power in the spring and into the summer. How far that goes depends on how quickly it melts off. Then we still have hydro. It's a run-of-the-river plant. We still have hydro, just not as much. We then become more subject to gas prices. The seasonality isn't as much due to availability of supply this year as it is due to the significant volatility in natural gas prices. We've seen, again, you know, largely, I'll say largely due to Ukraine-Russia conflict. I don't know that that's 100% what it is, but, you know, everybody's saying that that's, that that does definitely impact it.
The significant increase in gas prices has really caused that to become a challenge because that increases our cost to serve our load and our customers. For the, you know, if we haven't fueled our plants fully, and we don't, we tend to leave them open through time as, you know, to take advantage of lower gas prices. We don't fuel up 100%, and that's what the ERM. The ERM catches that movement. In this case, it's largely, I would say it's largely due to natural gas prices and the increase there than anything else. Than a timing. To try to say there I mean, there is a normal seasonality to the availability of our power, and there is a normal seasonality to our loads, right?
If we had unusually hot or cold weather, that does impact our loads. We haven't seen. It's been a little cool, you know, but we haven't seen any significant volatility with respect to loads due to weather.
Right. Understood. Maybe it seems like that dynamic you just described was in play during the first quarter of 2022. I'm just curious, you know, how you were able to optimize, you know, your generation portfolio and market purchases to actually benefit.
Well, we were actually down.
Mm-hmm.
Brian, we were actually down $2.5 million from last year. The first quarter, I mean, if there is a little bit there in the way that's shaped based on current prices, our first quarter last year was over $4 million, and this year we're under $2 million. Yes, we did have a slight benefit in the actual recording of it, but we were down in the first quarter as well.
Right. Got it.
Year-over-year.
Okay.
Year-over-year.
That $400 million bond deal that closed in late April for the refinancing, what was the interest rate on that?
It was late.
How does that compare with kind of your late March?
I think.
What was the borrowing rate on that, and how does that compare with your average borrowing rate?
Well, it was right around 4%. I think it was 4%, I believe. That overall our average borrowing cost is higher than that. I wanna say it's 5.5%. I don't know what we include in our total cost of borrowing. It did overall lower the cost of borrowing. It just was slightly higher than we had expected coming into the year. You know, rates have really ticked up lately. We did get a little bit of a negative there, and we would expect to update that as we go forward in our regulatory filings, as I mentioned, as a known and measurable item. We may or may not get that. That's up to the commissions. It was slightly higher than we expected, but still lowered the overall cost to our customers.
Okay. Just lastly, on the other business, you know, the $0.04-$0.06 of EPS in 2022 and in 2023, I mean, how sensitive are those estimates to, you know, market volatility? You know, I'm just curious, are these just forecasted, you know, net gains on, you know, positions that are monetized, or is there also kind of a market element function, you know, to that?
No. It's, you know. There's a lot of different things that we have, a lot of different investments. It's not. When we look at our business, right, it's not necessarily tied to gas prices or interest rates or that. I mean, these are investments that are growing early stage or, you know, onward businesses and in clean tech. Is it what conditions are out there? To the extent there's a continued investment in, you know, getting back to zero, you know, carbon emissions. You know, clean tech investments there have had a lot of benefit going forward. We expect to see that to continue as many companies. We have our own clean energy goals, as Dennis mentioned. You know, a lot of companies throughout the country are trying to have those goals.
These investments are around to try to help achieve those. We believe there will be strength in funding, and we've seen that, right? There's a lot of money coming into there. That is a benefit. Does that continue forever? I have no idea. I mean, over the next couple years, we believe that we'll be able to get there and achieve our results. But it's not based on monetization of any particular investment. It's included in there, but there is valuation impact too as we move forward. Again, these are very small. I know we spent some time on them, but it's $0.04-$0.06. The focus is primarily, you know, getting the utility back to earning our allowed return and.
Okay, great.
Maintaining the price for our customers.
All right. Thank you very much.
Thanks, Brian.
Thank you. Once again, in order to ask a question, please press star then the number one on your telephone keypad. Presenters, I'm showing no further question at this time. I would like to turn the conference back to Ms. Stacey Wenz for any closing remarks.
Thank you very much for joining us today. We look forward to seeing many of you in a few weeks in Florida. Have a great day.
Thank you, ladies and gentlemen. This concludes today's conference call. Thank you all for joining. You may now disconnect.