Avista Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 21, 2024

There are 8 speakers on the call.

Operator

Hello, and thank you for standing by. Welcome to the Avista Corporation 4th Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. I would now like to hand the conference over to Stacy Wentz.

Operator

You may begin.

Speaker 1

Good morning. I'm pleased to welcome you all to Avista's 4th quarter 2023 earnings conference call. Our earnings and 2023 Form 10 ks were released pre market this morning. You can find both on our website. Joining me this morning are Avista Corp.

Speaker 1

CEO, Dennis Vermillion President and COO, Heather Rosentrader Senior Vice President, CFO, Treasurer and Regulatory Affairs Officer, Kevin Christie and Vice President, Controller and Principal Accounting Officer, Ryan Krasselt. Today, we will make certain statements that are forward looking. These involve assumptions, risks and uncertainties, which are subject to change. Various factors could cause actual results to differ materially from the expectations we discuss in today's call. Please refer to our 10 ks for 2023, which is available on our website for a full discussion of these risk factors.

Speaker 1

To begin, I'll recap the financial results presented in today's press release. Our consolidated earnings for the Q4 of 2023 were $1.08 per diluted share compared to $1.05 for the Q4 of 2022. For the full year, consolidated earnings were $2.24 per diluted share in 2023 compared to $2.12 last year. Now I'm happy to turn the call over to Dennis.

Speaker 2

Well, thanks, Stacey, and good morning, everyone. I'd like to start by saying how proud I am of what we accomplished in 2023. We really had a great year. Our 2023 earnings at Avista Utilities show significant improvement from 2022 and reflect the benefits of improved cost recovery resulting from our general rate cases as well as our success in managing our costs through the headwinds of increased interest rates and the impact of higher power supply costs. Our improved earnings demonstrate the team's commitment to delivering results.

Speaker 2

This teamwork is core to Avista's values and there are many examples I could point to. To touch on 1, in November, we faced the largest natural gas outage in our company's history. Nearly 37,000 natural gas customers were impacted when a gas pipeline that transports gas to Avista system was damaged by a 3rd party dig in. Our people along with mutual aid workers from 8 utilities spanning 8 states and contract employees work safely to restore service to every impacted customer in less than 1 week. That we were able to achieve 100% restoration in such a short timeframe is a testament to the determination and drive of our people and the people who came alongside of us to help.

Speaker 2

I'm thankful for each one and for the resilience and understanding of our customers. We're thankful for the safety of all involved as well as the regulatory support from our commissions. We received approval to defer the costs of the incident for recovery to be addressed in a future regulatory proceeding. And I wouldn't be a utility guy if I didn't take this opportunity to say this, please call 811 before you dig. Although much of the winter season has been milder than normal, we experienced very cold temperatures in mid January.

Speaker 2

At the same time, 2 operational issues impacted our system and the natural gas system throughout the Pacific Northwest. Mechanical issues at both a third party transmission pipeline and the natural gas storage facility we partially own reduced the capacity of natural gas in the region. These challenges combined with the extreme cold resulted in very high commodity prices. Just as with the gas outage, I'm proud of the resilience of our customers and our operational decisions as we navigated these issues. Although we had to purchase energy during this period of higher commodity prices, these costs will be included under various deferral mechanisms for power and gas costs.

Speaker 2

We continue to make progress on our clean energy goals on the natural gas front with the 4 renewable natural gas supply contracts we've executed so far. We expect to purchase 9,700,000 therms of natural gas annually from renewable sources. We're also partnering with school districts in our service area to work toward fleet electrification and by the end of 2024, we expect to be working with 9 school districts on this effort. So whether it's improving the carbon profile of our natural gas operations or assisting our customers with electrification initiatives, we're building on our foundation of clean hydropower to work towards an even cleaner energy future for our region. In December, we published our 2023 Corporate Responsibility Report.

Speaker 2

The latest report includes progress updates regarding Navista's aspirational goals for clean energy and workplace equity inclusion and diversity, including supplier diversity. And I really encourage you to check out the report if you haven't done it already. Great report. You can see recent examples that demonstrate our longstanding commitment to doing the right thing for our environment, our people, our customers and communities along with our shareholders. Earlier this month, the Board increased our annual dividend to $1.90 per share.

Speaker 2

The Board has a long standing commitment to maximize shareholder value and we strive to target a competitive dividend for our shareholders. We are committed to providing affordable and reliable energy to our customers and we make customer focused investments in our infrastructure to improve reliability and maintain the safety of our operations. Periodically, this requires us to request adjustments to customer rates to reflect the actual cost of providing service. So in January, we filed 2 year general rate cases in Washington and gas. We've asked for increases in the 1st year of our plan of $77,100,000 for electric and $17,300,000 for natural gas.

Speaker 2

Coal strips exit from our generation portfolio will occur at the end of 2025 in compliance with the clean energy regulations in the state of Washington and the resulting change in the projected power supply costs when netted with the changes resulting in the elimination of coal strip costs results in a total request of $53,700,000 in the 2nd year of our plan for electric. On the natural gas side, we've asked for an increase of $4,600,000 in the 2nd year of our plan. Kevin will share more about our Washington filing in a moment. And at this time, I'll hand the call over to Kevin.

Speaker 3

Thanks, Dennis, and good morning, everyone. We've executed meaningful steps in our strategy at Avista Utilities that show in our results. Our core utility operations are strong and demonstrate significant earnings growth of over 35% in 2023 when compared to 2022. As Dennis mentioned, this increase at Avista Utilities is largely a result of improved cost recovery, successful cost management and lower net power supply costs. For the full year of 2023, the energy recovery mechanism was a pretax expense of 8,400,000 dollars compared to a pretax expense of $10,900,000 in 2022.

Speaker 3

AEL and P had a strong year as well. Their results met the high end of our expectations for the year. Our consolidated results came in below our expectations. This was the result of losses in our other businesses driven by the periodic valuation of our investments. We continue to invest the necessary capital in order for us to provide safe and reliable service for our customers and to comply with clean energy regulations.

Speaker 3

And we are getting timely recovery of that investment. This is in part due to the multi year rate plan structure in Washington, which allows us to place capital in rate base prospectively as well as filing rate cases on a timely basis. A significant portion of our Washington Electric rate request, more than half in year 1 and nearly 70% in year 2, is related to the reset of power supply costs, the removal of costs related to Colstrip from customer rates and recovery of costs we previously deferred, all of which we expect to fully recover. Our improved cost recovery in 2023 is partially the result of deferral mechanisms we've been successful in developing with our commissions, such as wildfire and insurance costs. We continue to focus upon additional regulatory mechanisms that improve cost recovery.

Speaker 3

To that end, in our Washington General rate case, we are requesting a modification to the We propose a straight 95% customer, 5% company sharing of power supply costs. The was introduced in 2,002 and the energy markets have evolved since then. We believe this is the appropriate time to refresh the mechanism to better reflect current market dynamics. We are committed to investing the necessary capital in our utility infrastructure. Our capital expenditures at Avista Utilities were $485,000,000 in 2023.

Speaker 3

So that we can continue to support customer growth and maintain our system to provide safe, reliable energy to our customers, Our planned capital expenditures are $500,000,000 in 2024, dollars 525,000,000 in 2025 $575,000,000 in 2026. Our planned expenditures for 2026 have increased to 25,000,000 dollars primarily due to projects planned for wildfire mitigation. AEL and P's capital expenditures were $14,000,000 in 2023 and $21,000,000 of capital expenditures are expected in 2024. We also invested $17,000,000 in other investments during 2023 and we expect to invest $22,000,000 in 2024. On the liquidity front, as of December 31, we had $146,000,000 of available liquidity under our committed line of credit and $30,000,000 available under our letter of credit facility.

Speaker 3

We issued $112,000,000 of common stock and $250,000,000 of long term debt in 2023. In 2024, we expect to issue approximately $85,000,000 of long term debt and $70,000,000 of common stock to partially fund our capital spending for the year. Improved cash from operations will help fund the remainder. We are initiating our guidance for 2024 with a consolidated range of $2.36 to $2.56 per diluted share. We expect Avista Utilities to contribute within a range of $2.23 to $2.39 per diluted share in 2024.

Speaker 3

We expect the impact of the on earnings to be negative during the Q1 of 2024 in the 50% customer, 50% company sharing band. For the full year, we expect the to be neutral to earnings as we anticipate a positive impact in the latter part of the year, which will offset the early negative impact. Our guidance for Avista Utilities in 2024 reflects unrecovered structural costs, which we estimate reduced the return on equity by 70 basis points. We expect 60 basis points of regulatory timing lag in 2024. This results in an expected return on equity at Avista Utilities of 8.1% in 2024.

Speaker 3

In 2023, the distribution of our earnings between quarters differed from our typical historical results due to the impact of customer tax credits being returned to customers, reducing customer bills and income tax expense. We expect the distribution of earnings between quarters in 2024 to more closely align with the results prior to 2023 with the 1st and 4th quarters representing the largest contributions to our annual earnings. We expect AELP to contribute in the range of $0.09 to $0.11 per diluted share in 2024 and we expect our other businesses to contribute in the range of $0.04 to $0.06 per diluted share in 2024. Assuming a constructive outcome in our 2024 Washington general rate case filings, we expect our earnings to grow over the long term in the range of 4% to 6% from a 2025 base year. Now we'll be happy to answer questions.

Operator

Thank you. Our first question comes from the line of Tanner James with Bank of America. Your line is open.

Speaker 4

Hi, good morning. Hi, good morning. Hi,

Speaker 5

good morning, team. Just a quick one sizing the and the ongoing support that updated bands might provide. What did the impact have looked like for 2023 with the updated bands as requested in your 2024 rate case filing? And then also regarding precision of your annual EPS guide, would implementation of a less volatile encourage you to tighten the typical EPS guidance range you provide? [SPEAKER THOMAS E.

Speaker 3

SALMON BERRY GLOBAL GROUP, INC.:] Salmon Berry Global Group, Inc.:] Yeah. Thanks for the questions, Tanner. The I don't have the exact numbers off the top of my head here, but obviously with the that was negative or our power supply cost it was negative to the tune of $0.09 If we had a $0.95 mechanism in place, it would have shrunk that significantly. My off the cuff estimate would be in the range of a couple of cents. And then to your second question, we'll continue to evaluate as we move through the Washington case how successful we are in modifying that mechanism and what comes out the other side before we can really say how we would narrow guidance on a go forward basis, if we would narrow guidance on a go forward basis.

Speaker 5

Great. Thanks. And then thank you for the disclosure of the wildfire related increase to the CapEx. For the cumulative T and D spending guide, can you deconstruct what might be allocated towards typical maintenance versus wildfire resiliency on a go forward basis? Just trying to figure out the run rate system need for wildfire resiliency going forward.

Speaker 3

Well, when we plan our capital spending, we have allocated the capital for 2024 on a basis based on need that we received from the business. And so those dollars are more well known or understood by project and program. As we look forward for 2025 and beyond, we have not yet allocated all the dollars among all the potential programs and projects. Generally speaking though, we would expect for capital for wildfire in 2025 to be about $35,000,000 or so and closer to $60,000,000 in 2026.

Speaker 5

All right, great. Thank you so much. Really appreciate it.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Willyette Grainger with Resubhub. Your line is open.

Speaker 4

Hi, good morning team.

Speaker 2

Hey, good morning.

Speaker 4

Thanks for taking my question. Maybe just a question on the financing plans. I see previously for 2024, you're guiding to about $60,000,000 of equity and it's come up modestly to $70,000,000 Just kind of wanted to understand what's driving that. I saw CapEx staying the same across utilities, but just any color on that would be super helpful. Thank you.

Speaker 3

Yes. That's really thanks again for the question. We are rebalancing debt and equity as we move forward with this case and as the regulators consider what we filed there. And so it's really just fine tuning the numbers at this point in time. As you pointed out, capital hasn't changed planning wise for 2024.

Speaker 3

We've had changes in expenditures, a little bit higher run rate for winter given power supply costs and what have you.

Speaker 4

Understood. And then maybe just one on kind of how are you thinking about I know you said weather's been challenging from an perspective so far in Q1 and in your guidance, you expect that to kind of balance out on the end of the towards the end of the year. Are you assuming that you just have more control over some of like the variables in the hydrology here? Or what's the puts and takes to that, if you can unpack that a little bit for us?

Speaker 5

[SPEAKER THOMAS E. SALMON BERRY GLOBAL GROUP, INC.:] Salmon Berry Global Group, Inc.:] Sure.

Speaker 3

We are building into our forecast the expectations of current hydro, which is below normal. And at the same time, we believe we have the opportunity to optimize our resources on a go forward basis. And if we're able to optimize the resources like we planned, that would help offset the Q1 negative.

Speaker 4

Understood. Thank you very much, team. I'll leave it there.

Speaker 3

And I also want to add that, of course, that assumes that we have a reasonable melt in our hydro, in our snowpack and that the flow comes over and we can optimize in our hydro facilities. To the extent that we have a hydro outcome that looks similar to 2023, it will be tougher to do that.

Operator

Thank you. Great. Please stand by for our next question. Our next question comes from the line of Brian Russo with Sidoti. Your line is open.

Speaker 6

Hi, good morning.

Speaker 2

Hey, Brian. Hey,

Speaker 6

you mentioned the 2 buckets of regulatory lag that support the 2024 guidance. Just remind me what can be mitigated with new Washington rates in 2025? Is it the 60 basis points of timing or is it the 70 basis points of structural?

Speaker 3

Yes. The structural lag Brian can't change. It's in place because of rule or law. So we're focused on the timing lag, that 60 basis points. And with the constructive outcome in the Washington case, ongoing fair treatment on our deferral mechanisms and keeping in mind that we need to file rate cases or we'll likely file rate cases in Idaho and Oregon as we move forward.

Speaker 3

Assuming we manage our costs, all of that would allow us to reduce that 60 majority of that 60 basis points.

Speaker 6

Okay, got it. So the way to look at your earnings trajectory in 2025 versus 2024 is ROE improvement on a growing rate base, just simplistically as that?

Speaker 3

Yes. And assuming we continue to manage our costs appropriately and we get that good regulatory treatment or constructive regulatory treatment.

Speaker 6

Yes. Okay, great. And then in past calls, you've talked about longer term transmission and renewable investment opportunities. And then I see on Slide 9, there's a bullet evaluating opportunities for expansion on the generation side, I think. Could you maybe elaborate on that?

Speaker 6

And that just kind of ties into this it looks like a $575,000,000 run rate CapEx in 2026 to support a 5% rate base growth, right, on a growing rate base. Is that kind of the optimal CapEx level to manage customer rates and maybe that balance of purchase power agreements versus steel in the ground that you have now?

Speaker 3

Yes. The way I look at it Brian is that the run rate that we've given you on capital is the capital we need to spend to continue to run the utility and balance customer rates. To the extent that we have an opportunity to invest further in clean generation that may be incremental to our current capital plan. And the way I've been thinking about it is we have more near term opportunities to potentially invest in clean generation that's not in our rates right now through ownership. And there may be something out there that we could purchase that would make sense both for customers and for the company as we move forward.

Speaker 3

And then on the transmission side, there are really I think about it this way, there is the opportunity to enhance or build around our current system. That's more of a near term opportunity. And when I do say near term, I don't mean this year or next year, but nearer. And then when we think about transmission really across the entire region and perhaps the country, there's a longer term requirement if we're going to deliver all this clean energy to all the locations that it needs to be delivered and that takes quite a bit more time.

Speaker 6

Okay, great. And then just to follow-up on the I think it's been many years since you've actually tried or proposed adjustments to that. When was the last time you did request an earned adjustment? And would you say that the adjustments you proposed puts you kind of on a more comparable level relative to your regional peers?

Speaker 3

Yes. Good question. Yes, it was in the late 2000s. I think the last time we filed to adjust the or we put in adjust the and the we're watching closely regional peers that there's been some change in power supply treatment in Oregon and there's a filing in Washington that we're keeping a close eye on as well. And we think that if we're able to move forward with this change, it would position us at par with our peers.

Speaker 6

Okay, great. Thank you very much.

Speaker 3

Thank you.

Operator

Thank you. We do have a question from Alan Roche. Mr. Roche, your line is open.

Speaker 7

Good morning. Appreciate the conference call. I'm curious as to the 2 wildfires that happened in the summer of 2023. Does that had a negative impact on your bottom line?

Speaker 2

Yes. I mean with regard to the wildfire, I you're referring to the fire north of the Spokane area and then there was one west of town. With regard to both of those, our facilities were impacted by the fire on the West Plains of Medical Lake area. We lost some of our infrastructure out there. However, we were not involved in any way shape or form with the start of that fire.

Speaker 2

And then with the other fire that was north of the Spokane area, that happened and originated well away from all of our facilities. And in fact, none of our infrastructure was damaged in that fire. So really no impact at all to the bottom line. We had to spend a little bit of money fixing all the stuff that was lost out on the West Plains there, but that was definitely manageable.

Speaker 7

Got you. That's good news. One other quick question. If the breachment of the 4 Snake River dams happens to occur, how is that going to affect your bottom line?

Speaker 2

Well, the 4 Snake River dams are federal projects and the power output from those facilities is managed by the Bonneville Power Administration. We do not have any ownership stake or any off take agreements for generation from those facilities. So it really won't impact us at all from a power supply perspective. However, regionally, you'd be taking 1,000 megawatts of supply out of the system. So you until that's replaced in some manner, you could see an impact on commodity prices on power prices in markets.

Speaker 2

But no direct impact to our company from removal of those facilities.

Speaker 7

Okay. Thank you.

Operator

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Stacy for closing remarks.

Speaker 1

Thank you all for joining us today and for your interest in Avista. Have a great day.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Avista Q4 2023
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