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. [Operator Instructions] 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 and 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 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 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 abilities 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 committees 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. And third, youth success. We recognize that today's youth face many challenges and that's…

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, so it's a good day 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 and on a year-to-date basis, we've contributed -- Avista Utilities has contributed to $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&M and the donation commitment that Scott mentioned earlier. The ERM in Washington was a pretax 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 a benefit of $3.5 million compared to a $5.8 million benefit in 2018. We continue to be committed to investing the necessary capital on our utility infrastructure and we expect Avista Utilities to have an increased capital expenditure of $435 million and the $30 million increase results primarily from additional capital expenditures for renewable integration for a wind project and additional customer growth. As of June 30, we have $212 million of available liquidity under our credit facilities and 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 and then maintain an appropriate capital structure. This does represent an increase as I mentioned with the…

And now, we will open this call for questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] 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 enacted Washington legislation, I know the commission recently held a workshop on its implementation. Just curious if any feedback or just taking 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 in the -- 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 METALfx 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 that kind of continue?

The big change is due to the gain, so yeah. You won't -- you wouldn't expect the gain in the future of that. So that'd 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 we do have some historical losses in that area we expect that to continue.

All right. Great. That’s all I have. 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 investment, -- so you're not really expecting -- how should we think in general about this business I guess? Just -- you see the track basically going back to a loss is that what you're saying? And this is just sort of a onetime gain, or is there sort of some portfolio management that we should be thinking about in terms of this business?

Yeah. 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, we have small losses, very small losses and we did have a gain on this one. And METALfx 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 $0.05 a share in our guidance. We expect that to 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 turnaround, but we don't give guidance beyond the next year or two. We know 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'll probably revert to a small loss.

Okay. And then just, in the release, there was a discussion of the effective tax rate being negative 7.5% 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 the -- if it is any. And then, just in general what the normalized -- what's the tax rate you see for 2019, and just sort of you’re 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%. So, we did have some unusual things occur in the second quarter, and they were offsetting some depreciation changes. So, overall we -- the statutory rate is at 21%. We have some 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 more 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 coal strip 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, so yes. We were offsetting additional depreciation at coal strip. So it really 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.

The next question comes from Sophie Karp from KeyBanc.

Hi. Good morning, guys. Can you hear me?

Sophie if you can --I don't know if you need to move closer because we can barely hear you.

Oh, is this better?

It's better.

Oh, 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 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 would we should be thinking as a base right? So what would it have been without those items and the gain versus your guidance?

Okay. Just take out -- you take out the $1.01 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 $0.05 a share largely due to the gain on METALfx and other earnings. So 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. And then again we do expect to have the higher growth as we get -- 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% growth off of the midpoint of our original guidance. And that takes off the $1.01 termination fee.

And so $1.01 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.

Got you. Thank you.

The next question comes from Vedula Murti from Avon Capital.

Good morning.

Hi, Vedula.

I 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% tax rate is associated with much higher depreciation expense such that if we go forward into future say 2020 then the tax rate normalizes the associated prior depreciation expense goes away and that's why there is no net income effect?

There is no net income effect in this quarter. Our depreciation in the future again will be impacted. I mean, you'll have some offset with the taxes in the future as you're continuing to roll forward a higher depreciation on coal strip. But that will be offset and it won't have the same impact on annual basis as it happened to do in this quarter because we also had a one-time change there, so we are doing a little catch-up. You don't even think about it for the future. It's going to be offsetting any additional coal -- any additional depreciation accelerated in that for 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 as what we've said. You don't have to -- I'm not going to get into details of every line item event. It's -- it does not affect our guidance going forward.

Okay. And in terms of the contribution that was made the $7 million should we consider that as a onetime type of item, or is this something that -- periodically over every few years or something like that as part of your community activities occurs? So 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 onetime item that I should not be -- I shouldn't be perpetuating in any material fashion?

No. 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. So we'll -- that was a onetime 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. So that onetime $7 million is a unique contribution.

So it would be appropriate to offer an ongoing basis to at least remove that $7 million?

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 that we have there's a number of them that kind of go both ways have -- they have valuations that increase or decrease. And recently we're 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 two 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've got some small increases on the other investments. We do expect that to increase as we go through time, but it -- currently it's not expected to be very large.

Okay. And 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.

Well, 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. 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 is -- 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 review on that. We only filed 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.

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. 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 allowed 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 a notice of intent, you weren't sure what you were expecting?

We didn't know if we had to specifically. We had to run the numbers and get the allocations between Washington and Idaho. So -- but we have to file that notice of intent, so we have 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. I mean, we -- 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're not going to provide that. We expect that this month, so we're not making you wait too long.

Okay. Thanks for the details. Appreciate it.

Thanks, Chris.

[Operator Instructions] The next question comes from Andrew Levi from ExodusPoint Capital.

Hi, guys. Just have a quick question.

Good 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'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 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.

Oh, you mean like CapEx?

Yes, CapEx. Or if the cost is related to...

So are you -- 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.