Avista Corporation (AVA) Q2 2017 Earnings Report, Transcript and Summary

Welcome to the Q2 2017 Earnings Conference Call. My name is Jason, and I will be your operator. [Operator Instructions] Also please note this conference is being recorded. I will now turn the call over to Jason Lang, Manager of Investor Relations. Jason, you may begin.

Thank you, Jason. Good morning, everyone. Welcome to Avista's Second Quarter 2017 Earnings Conference Call. Our earnings and our second quarter 10-Q were released pre-market this morning and they’re both available on our website at avistacorp.com. Joining me this morning are Avista Corp. Chairman of the Board, President and CEO, Scott Morris; Senior Vice President and CFO, Mark Thies; Senior Vice President and President of Avista Utilities, Dennis Vermillion; Vice President, State and Federal Regulation, Kelly Norwood; 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 in today's call, please refer to our 10-K for 2016 and our 10-Q for the second quarter of 2017, 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 2017 were $0.34 per diluted share compared to $0.43 for the second quarter of 2016. For the year-to-date, consolidated earnings were $1.30 per diluted share for 2017 compared to $1.34 last year. Now I'll turn the discussion over to Scott.

Good morning, and thank you, Jason. We recently took an important step to position our company for the future by signing a definitive merger agreement with Hydro One, Ontario’s largest electricity transmission and distribution provider. The merger is expected to close in the second half of the 2018, subject to required approvals. We expect to file for all necessary approvals within 45 to 60 days from the date of the merger agreement. For us, the decision to team up with Hydro One at a time of strength and growth represents a win for our customers, employees, shareholders and the communities that we serve. Through this agreement, we have the unique opportunity to secure a partnership that allows us to preserve our identity and proud legacy and continue charting our own course in a rapidly changing industry. Our leadership team spent a great deal of time considering this transaction and locking in the things that are most important to our culture, customers, community and shareholders. This included being governed by a board of directors reties to the Pacific Northwest as well as maintaining our entire work force and keeping our headquarters right here in Spokane. Another important consideration in this process was to make sure that communities Avista serves will continue the benefit from the important philanthropy and economic development that Avista provides. In fact, Hydro One is committed to doing even more, nearly double of Avista’s current levels of community support. With Hydro One as our partner, we will continue to uphold our longstanding committeemen to environmental responsibility, innovation, safety and reliability. This combination will provide increased opportunities for innovation and efficiencies by extending the use of technology, best practices and business processes over a much broader customer base and a broader set of infrastructure. We look forward to joining forces with Hydro One and its dynamic team. Now focusing on our 2017 earnings. We continued to have earnings above our expectations. Our higher earnings in the second quarter were mainly from lower-than-expected operating expenses and lower resource costs. The lower resource costs were partially due to increased hydroelectric generation that increased our benefit position in the energy recovery mechanism in Washington. Although 2017 earnings are better than our expectations, our earnings are down compared to 2016 due to no revenue increases being granted in our December 2016 Washington rate order. AEL&P had another solid quarter with earnings above our expectations, primarily due to increased electric loads from colder weather. During the second quarter, we filed two separate rate requests with the Washington Utilities and Transportation Commission. A $15 million of power cost rate adjustment was filed to update Washington power supply cost with a requested effective date of September 1, 2017. We expect the response from the Commission in August. We also filed a three-year electric and natural gas general rate case with requested increases in May of 2018 through 2020. In Idaho, we filed a two-year electric and natural gas general rate case during the second quarter. And in Oregon, we reached a settlement agreement to our 2016 general rate case that was filed with the Oregon Commission. Based on our earnings for the first half of 2017 and our expectations for the remainder of the year, we are reconfirming our consolidated earnings guidance range of $1.80 to $2.00 per diluted share and we expect to be in the upper half of this range, excluding merger transaction costs. So at this time, I’m going to turn it over to Mark.

Thanks, Scott. Good morning, everyone. I want to assure everyone that we’ll be happy because Toronto does have hockey. The Maple Leafs made the playoff last year, so things are looking good from that perspective. You all know how much I love hockey. For the second quarter of ‘17, Avista Utilities contributed $0.34 per diluted share compared to $0.42 in the prior year; and on a year-to-date basis, Avista Utilities contributed $1.24 per diluted share, down slightly from $1.29 last year. The decrease in earnings for both the quarter and year-to-date were due to increased operating expenses, depreciation and interest expense with no offset in rate relief, as Scott mentioned, in 2017 from Washington. The decrease in earnings was partially offset by general rate increases in Idaho and Oregon, customer growth and lower resource cost due to stronger hydro. On the capital side, we continue to be committed to invest in the necessary capital in our utility infrastructure and we continue to expect Avista Utilities’ capital expenditure to total about $405 million in 2017 and AELP’s capital expenditure to be about $7 million in 2017. In the second half of 2017, we do expect to issue up to $90 million in long-term debt and up to $70 million of common stock in order to fund planned capital expenditures and then maintain an appropriate capital structure. As Scott mentioned earlier, we are confirming our 2017 guidance for consolidated earnings to be in the range of $1.80 to $2 per diluted share and we expect to be in the upper half of this range excluding merger transaction costs. Those costs totaled just under $1 million to-date, and we expect those to increase as we move forward with different approvals. We expect Avista Utilities to contribute in the range of $1.71 to $1.85 per diluted share for 2017. The midpoint of that guidance includes $0.07 of expense under the ERM, which is within the 90/10 sharing band for the customers. Our current expectation for the ERM is an expense position within the $4 million deadband, which is an improvement to $0.04 to $0.05 per diluted share from our original guidance. Our outlook for Avista Utilities assumes, among other variables, normal precipitation and temperatures and slightly lower-than-normal hydroelectric generation for the remainder of the year. Our 2017 Avista Utilities guidance continues to encompass unrecovered structural costs estimated to reduce the return on equity by 70 to 90 basis points, and in addition, our 2017 guidance includes regulatory timing lag directly associated with the Washington jurisdiction and resulting from no revenue increase in our 2016 rate case, which is estimated to reduce the return on equity by 100 to 120 basis points. This results in expected return on equity range for Avista Utilities to 7.4% to 7.8% in 2017. We will continue to strive to reduce this timing and lag, and as Scott mentioned, we have filed multi-year rate cases in both Washington and Idaho to more closely align our earned returns with those authorized by the 2019-2020 time period. For 2017, we expect AEL&P to contribute in the range $0.10 to $0.14 per diluted share; and our outlook for AEL&P assumes, among other variables, normal precipitation in hydroelectric generation for the remainder of the year. We expect our other businesses to be between a loss of $0.01 and a gain of $0.01 per diluted share, which includes costs associated with exploring strategic transactions. Our guidance generally includes only normal operating conditions and does not include unusual items, such as settlement transactions or acquisitions and dispositions until the effects are known and certain. Our guidance also does not include any amounts related to our power cost rate adjustment request for 2017. I’ll now turn the call back over to Jason.

Thank you, Mark. Jason, we’d like to open the call up for questions, please?

Thank you. [Operator Instructions] And our first question comes from Joe Zhou from Avon Capital Advisor.

Hi, guys. Congratulations on the merger.

Thank you, Joe.

Thank you. Good morning, Joe.

Good morning. I guess Ontario people love hockey too. Just on this Hydro One acquisition, would you please go over the regulatory approval process state by state?

Yeah, this is Kelly Norwood. We are in the process of putting together filings. We expect to make those filings in all five states in early to mid-September. So those will go to Washington, Idaho, Oregon, Montana and Alaska. We’ll also make a filing with the FERC for approval there. We’ll file with the Federal Communications Commission. There is also a filing with the Committee on Foreign Investment in the U.S., and then there’s also the time on the Hart-Scott-Rodino that we need to pass.

We are also expecting that think tank, Joe, to file the proxy describing the details of the transaction more fully and go to a shareholder vote after that once it’s approved by the SEC. And that will be in the same timeframe. Kind of early to mid-September is our current expectation for that.

Great. And just a more specific on Montana. I’m aware that you do have a transmission line to small customer base there. Recently, Commissioner Kavulla, he sent a twist saying that he was looking to the Hydro One acquisition. So do you think Montana will be a difficult state to get the regulatory approval among the five states?

If you look at the story here, the business case for this, it’s a very strong business case, and so I think the story is good. There is Nicola split issue has been raised in Montana, but that issue is one that will be worked out among the owners, having customers in the state of Montana. So it remains to be seen what issues are raised to this process. As you mentioned, we have roughly 50 to 75 retail customers in Montana. We’ll file there and we do expect approval in Montana.

Okay. So if Montana hold up on the approval process, will it delay the whole merger process?

We’ll file in all five states early in mid-September, as I indicated, and we think we’ll be able to work through all of those states within roughly 11- to 12-month period.

Okay. Understand. Well, thank you very much.

[Operator Instructions] And we do have a question from Greg Reiss from Millennium.

Hi there. It’s actually James Ward here. First off, congrats again guys on the merger announcement. It’s great news. I just wanted to understand a bit more of how it came about. Did Hydro One approach you or had you been shopping around for it?

We will file all of that in our proxy when we go to -- so early to mid-September, we will have the timeline of everything that occurred. If there were other parties that we talk to, different parties, that will all be fully discussed in that proxy, and that’s really when we’re going to talk about how all this process came about and the actual process that ended up resulting in the definitive agreement been signed.

Got you. Okay. Just in between now and when you do file that proxy in early September, I think we’re all just trying to understand whether Hydro One’s bid was -- whether you are able to satisfy yourself that it’s the highest available, and just to make sure we understand the timeline even between now and early to mid-September and how things could change or play out?

We’re not going to comment on anything until we file the proxy and we file at the same time. As Kelly mentioned, we’re going to file our case with all of the different state commissions. So that’s really what we’re going to have all that detailed information for all the shareholders to disseminate.

Got it. Okay. Again, congratulations, and thank you for taking my questions.

Thank you.

And we have no further questions in queue. I will now turn it back to Jason Lang for closing remarks.

I would like 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. Thank you for participating, and you may now disconnect.