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Avista Corp (NYSE:AVA)
Q3 2020 Earnings Call
Nov 4, 2020, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Avista Corporation Third Quarter 2020 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to turn the call over to your speaker today, John Wilcox, Investor Relations Manager. Thank you. Please go ahead, sir.

John Wilcox -- Investor Relations Manager

Good morning, everyone, and welcome to Avista's Third Quarter 2020 Earnings Conference Call. Our earnings were released pre-market this morning and are available on our website. Joining me this morning are Avista Corp President and CEO, Dennis Vermillion; Executive Vice President, CFO and Treasurer, Mark Thies; Senior Vice President, External Affairs and Chief Customer Officer, Kevin Christie; and Vice President Controller and Principal Accounting Officer, Ryan Krasselt. Just want to let you know that analysts [Phonetic] are remote due to the pandemic.

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 2019 and 10-Q for the third quarter of 2020 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 third quarter of 2020 were $0.07 per diluted share compared to $0.08 for the third quarter of 2019. For the year-to-date, consolidated earnings were $1.04 per diluted share for 2020 compared to $2.21 last year.

Now, I'll turn the discussion over to Dennis.

Dennis Vermillion -- President and Chief Executive Officer

Well, thanks, John and good morning, everyone. As we begin the ninth month of working through the COVID-19 pandemic, we hope you're staying safe and healthy as we see the numbers of cases climb across our country. Avista continues to support our customers and communities. Recently, Avista and the Avista Foundation approved another round of funding as community agencies experienced an increased need for services, which now boost our charitable giving their share to more than $2 million throughout the areas we serve. And with numerous communities throughout our region were devastated by the Labor Day windstorm, we partnered with community leaders to quickly galvanize resources to help those who were impacted.

Today, we continue to look for ways to support affected communities as they work to repair the damage and rebuild. Amidst the stress and the strain of these uncertain times, the safety of our customers, our employees and our communities continues to be our top priority and I continue to be amazed and inspired by our employees who work safely and diligently to provide the energy that is so essential to our customers.

Despite these trying times, we continue to make significant progress across our business. In September, Avista Chairman, Scott Morris's vision to create the five smartest blocks in the world became a reality with the grand opening of the Catalyst Building and the adjacent Morris Center for Energy Innovation. These two new buildings are the latest examples of Avista's rich history of innovation, a centralized plant located in the Morris Center will provide the energy to power both buildings through a shared energy model we call it Eco-District. This type of innovation will be essential to achieve a clean reliable and affordable energy for all of us. Also a majority of our Washington smart meter project will be completed in the next few weeks. And this means our Washington customers will have access to more timely information about their energy usage during the upcoming winter heating season.

Last week, we filed general rate cases in Washington. Due to the challenges caused by the COVID-19 pandemic, we have worked very hard to identify how we can move forward in a way that doesn't increase the cost to our customers at this time, while also acknowledging the financial investments we've made in infrastructure on our customers behalf. Through the use of a tax credit to customers, our proposal would completely offset an immediate increase in electric and natural gas bills. I'm proud of our employees for finding an innovative solution to balancing the interests of our stakeholders.

With respect to results, our third quarter consolidated earnings were below our expectations, primarily due to higher bad debt expense for Avista utilities. However, we anticipate being able to defer the additional bad debt expense through a COVID-19 deferral in the fourth quarter. As such, we are confirming our 2020 consolidated earnings guidance in the range of $1.75 to $1.95 per diluted share.

And now, I'll turn this presentation over to Mark.

Mark Thies -- Executive Vice President, Treasurer, and Chief Financial Officer

Thanks, Dennis. Good morning, everyone. I always love to start out with my usual Blackhawk comment and we got rid of two time Stanley Cup champion goalie, Corey Crawford, which is a sad day for me. Craw was a great goaltender and really led us to a couple of championships. So we'll see how we do in this upcoming season. But with that, I'll start, talk about Avista now, which is what you want to hear about. The third quarter of 2020, Avista Utilities contributed $0.08 per diluted share compared to $0.09 in the prior year. And compared to our third quarter, our earnings decreased due to higher operating expenses as Dennis mentioned primarily related to bad debts and decreased loads resulting from COVID-19. This was partially offset by higher utility margin due to lower power supply costs and rate relief in Washington and Oregon. In addition, we also had some customer growth, which helped out margins.

The Energy Recovery Mechanism in Washington was a slight pre-tax benefit in the third quarter of $0.3 million compared to an expense in the prior year of $2.4 million. For the year-to-date, we've recognized the benefit pre-tax of about $6 million compared to just over $1 million in 2019. With respect to the COVID-19 impact on our results, we have recorded an incremental $8 million of bad debt expense year-to-date and we expect an additional $3.5 million for the full year as we compare to our original forecast.

In July, Idaho issued an order that allows us to defer certain costs, net of any decreased costs and other benefits associated with COVID. For the year-to-date, we deferred $2.5 million of that bad debt expense associated with the order. Now with that, so the third quarter had we had orders in Washington and Oregon in the third quarter, we would have deferred an additional $0.06. We expect to defer that in the fourth quarter, as we do expect, we did get an order in Oregon very late and we got it in October, and we do expect an order in Washington to allow us the deferral of those costs. So that would have benefited the third quarter by $0.06 had those order has been in the third quarter.

Compared to normal, our third quarter was a decrease of 2% on loads -- on electric loads which consisted of a 6% decrease in commercial as well as a 6% decrease in industrial, which was partially offset by a 5% increase in residential load, which is consistent with past quarters. We expect a gradual economic recovery, but prolonged unemployment that will depress load and customer growth into 2021. We do have decoupling mechanisms, which really mitigates the impact of changes in loads for revenues for residential and certain commercial customer classes, and over 90% of our utility revenues are covered by our regulatory mechanism.

During the third quarter, we continued to experience some supply chain delays due to the effects of the pandemic, with delays ranging from a couple of weeks to eight weeks in some cases. However, we do not expect to have a significant impact on any of our planned projects this year. With respect to that, we continue to be committed to investing the necessary capital in our utility infrastructure and expect to spend approximately $430 million, which was up from about $405 million in 2020 at Avista Utilities. This is primarily due to higher development of growth in our customer base.

As of September 30, we had $324 million of available liquidity under our credit facility. And during the third quarter, we issued $165 million of long-term debt and we expect to issue up to $70 million of equity in 2020 and that includes the $53 million we issued through September.

With respect to earnings guidance, as Dennis mentioned earlier, we are confirming our 2020 earnings guidance with a consolidated range of $1.75 to $1.95 and we expect to be near the midpoint, including the benefit of the ERM, which is a change we are including the benefit of the ERM which offsets some additional costs we've incurred, as well as some lower margin we expect to incur relative to our forecast, primarily due to the pandemic, that's not covered by our decoupling mechanism. So, it'd be certain commercial customers and our industrial customer base.

We expect that the COVID impact related to these operating expenses including bad debt will mostly be offset by tax benefits in the CARES Act, but the part that we don't, we're using the ERM to cover. We have filed for deferred accounting treatment for our COVID expenses, I mentioned each of our jurisdictions, and we anticipate being able to differ in Washington and Oregon in the fourth quarter. We continue to experience regulatory lag and we expect that to continue until 2023, which is consistent with what we've said in the past. In the general rate case in Oregon, we filed that in March, we filed in Washington, in Oregon, we just filed that last week and we anticipate filing in Idaho in the first quarter of 2021.

We are still expecting our long-term earnings growth after 2023 to be 4% to 6%. We expect Avista Utilities to contribute in the range of $1.77 to $1.89 per diluted share for 2020 including the ERM, our current expectation is that the ERM will be in a benefit position than a 90:10 [Phonetic] sharing band, which is expected to add $0.06 per diluted share. The benefit of the ERM is offsetting lower utility margin and higher operating costs.

Our outlook for Avista Utilities assumes among other variables normal precipitation, temperatures and hydroelectric generation for the remainder of the year. At AEL&P, we expect to contribute in the range of $0.07 to $0.11 per diluted share. And our outlook for AEL&P assumes among other variables normal precipitation and hydroelectric generation for the remainder of the year. We expect our other businesses to have a loss from $0.09 to $0.05 per diluted share, and our guidance generally includes only normal operating conditions and does not include unusual items such as settlement transactions or acquisitions or dispositions until the effects are known and certain. We cannot fully predict the duration and severity of the COVID-19 global pandemic. And the longer and more severe the economic restrictions and business disruption, the greater the impact on our operations and our results.

I will now turn the call back over to John.

John Wilcox -- Investor Relations Manager

And now we would like to open up this call for questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Richard Ciciarelli with Bank of America. Your line is open.

Richard Ciciarelli -- Bank of America -- Analyst

Hey, good morning. Hope you're all doing well today?

Dennis Vermillion -- President and Chief Executive Officer

Good morning, Richy.

Mark Thies -- Executive Vice President, Treasurer, and Chief Financial Officer

Hi, Richy.

Richard Ciciarelli -- Bank of America -- Analyst

Hi, first question just on the regulatory front in Washington. You ultimately elected not to file the multi-year rate plan but seem to find a convenient solution with the tax credits. Just curious of any initial feedback from stakeholders there in the state and any precedents for the accelerated flowback for customers on the tax credit side?

Kevin Christie -- Senior Vice President, External Affairs and Chief Customer Officer

Good morning, Richard, it's Kevin Christie, good to hear from you. The -- we talked in advance with our commissioners in Washington and give them the heads up. But no, we haven't had any conversations with any of the parties, since we filed.

Richard Ciciarelli -- Bank of America -- Analyst

Okay. Got it. Still early there...

Mark Thies -- Executive Vice President, Treasurer, and Chief Financial Officer

Richard, with respect to the tax position, we did file also with our rate cases we filed petitions for a change in accounting, which we need approval from all of our commissions to change the accounting on certain of those tax strategies that we are -- we're completely able to do, but we will need their approval and that allows us to accelerate the flow back of those deferred tax items to the benefit of our customers.

Richard Ciciarelli -- Bank of America -- Analyst

Okay, got it. Thank you. That's helpful. And then just on the COVID deferral docket in Washington, I know the commission now was taking a more of a wait and see approach, but it sounds like you're confident you'll get something in 4Q here. I guess what just gives you confidence in that FM?

Kevin Christie -- Senior Vice President, External Affairs and Chief Customer Officer

Yeah, this is Kevin again. We expect the Commission to take action in meeting in November. And as we went through the process, the proceeding with third parties, we saw the commission take the steps to move forward with this first aspects and no pun intended deferred the deferral part of until a subsequent meeting. But everything we've seen in the process, and as we work with third parties, we would expect the commission to move forward with approval on that.

Richard Ciciarelli -- Bank of America -- Analyst

Got it. That's helpful. And one more if I can just slip in. Any update on the timing of the DNR investigation?

Mark Thies -- Executive Vice President, Treasurer, and Chief Financial Officer

No, we don't really have any update on that. Dennis, anything?

Dennis Vermillion -- President and Chief Executive Officer

No, we don't have any updates. It would be very difficult to speculate. So I think that would be a question-best asked of DNR.

Richard Ciciarelli -- Bank of America -- Analyst

All right, thanks a lot. That's all I had.

Mark Thies -- Executive Vice President, Treasurer, and Chief Financial Officer

Thanks, Richard.

Operator

Thank you. Our next question comes from Brian Russo with Sidoti. Your line is open.

Mark Thies -- Executive Vice President, Treasurer, and Chief Financial Officer

Good morning, Brain.

Brian Russo -- Sidoti -- Analyst

Hey, good morning, everyone. Just to clarify on the midpoint of the guidance, it includes $0.08 for the ERM and it also includes COVID recovery of deferred bad debt of deferred costs in the fourth quarter, correct?

Mark Thies -- Executive Vice President, Treasurer, and Chief Financial Officer

We do expect to be able to cover to differ most of the bad debt, there is a calculation there it may not be 100% of it, but we do expect to differ most of it that we do expect to record in the fourth quarter, but the ERM is only $0.06, Brian as I mentioned earlier on the call, not $0.08.

Brian Russo -- Sidoti -- Analyst

Okay. So the midpoint includes the $0.06 benefit from the ERM and assumes COVID -- most of the COVID cost recovery on the bad debt in the fourth quarter?

Mark Thies -- Executive Vice President, Treasurer, and Chief Financial Officer

Yes. Well, we will report it, we don't -- we're deferring those costs, we don't necessarily get recovery until the commissions in each of our states rule that we can recovery, we're just allowed to defer it. So it's not an expense in our books that will reverse an expense we've already recorded, not to give you an accounting rule, but my controller here is not happy with me right now.

Kevin Christie -- Senior Vice President, External Affairs and Chief Customer Officer

Yes. Understood, thanks for the clarification. And then the wildfire plan costs that you're requesting deferral of in the recently filed Washington rate case, is that O&M expense cost that would be incurred that you're looking to differ for recovery of later? Or is that rate base or capex or rate base investment that you would seek to differ and recover a return of and on at a later date? Just curious.

Dennis Vermillion -- President and Chief Executive Officer

Yeah, Brian, I'll take the latter first. We're including about $2.6 million of capital for the first 10 months, I'm sorry, first nine months of 2021. And then its O&M for the tracker of balancing account that we are proposing in the filing. And in 2021 that's about $5.4 million. And I think of it as a balancing account mechanism. The idea here is that O&M increases, decreases, initially increases over time and then decreases levels out a bit. And of course, this is the biggest portion or has the biggest impact on our overall rate lager rate on our financial situation by moving the O&M if approved.

Brian Russo -- Sidoti -- Analyst

Okay. Right. So deferral of that helps your lag relative to historical levels?

Dennis Vermillion -- President and Chief Executive Officer

Yes, it would.

Brian Russo -- Sidoti -- Analyst

Okay. And then just on the increasing capex in 2020 to $430 million out of this Utilities, is that just one time, meaning it's just for 2020 or is that a step-up in the annual capex run rate of about $405 million?

Mark Thies -- Executive Vice President, Treasurer, and Chief Financial Officer

All right, at this point, we just -- were given the guidance on this year, we'll continue to look at it as if growth accelerates, we'll have to look at that if in the future. But in this year, we did see some higher cost associated with customer growth. So we added that in there. So right now we're not giving guidance for next year. We'll provide guidance for next year in February. And that will include our capital assumptions.

And Brian, just to be clear on your question on the O&M related to wildfire when Kevin mentioned the balancing account, that not as much historical lag as it is protecting future cost increases due to our wildfire resiliency plan and the costs associated with that. So we're attempting to differ those costs as opposed to recovering prior year's costs that would slow lag. What it does is it protect us from additional lag, but it may not reduce lag because it's really covering additional cost. Just to clarify how that works or how we propose it to.

Brian Russo -- Sidoti -- Analyst

Okay, got it. And then just on that. The wildfire plan you're referring to was that $200 million, I think $70 million of 10-year proposal filed with the commission several months ago, that is still pending review the two quarterly...

Dennis Vermillion -- President and Chief Executive Officer

To be clear there, Brian, we filed with Idaho for Idaho's portion previously, and now we're including the Washington portion here.

Brian Russo -- Sidoti -- Analyst

Got it. Understood. Thank you very much.

Mark Thies -- Executive Vice President, Treasurer, and Chief Financial Officer

Thanks, Brian.

Operator

Thank you. [Operator Instructions] Our next question comes from Sophie Karp with KeyBanc. Your line is open.

Mark Thies -- Executive Vice President, Treasurer, and Chief Financial Officer

Good morning, Sophie.

Sophie Karp -- KeyBanc -- Analyst

Hi, good morning, guys.

Dennis Vermillion -- President and Chief Executive Officer

Hi, Sophie.

Sophie Karp -- KeyBanc -- Analyst

How are you?

Mark Thies -- Executive Vice President, Treasurer, and Chief Financial Officer

Good.

Sophie Karp -- KeyBanc -- Analyst

Yeah, thanks. Just wanted to really just quickly that's based on the balance sheet rate would be -- we're just looking at the rate cases that you have in process or planning to file. It looks like you did in earnings, but not necessarily cash flow in, how are you thinking about balancing impact of that and is that a concern? Thank you.

Mark Thies -- Executive Vice President, Treasurer, and Chief Financial Officer

So what we looked at is given what's going on, we were -- as Dennis mentioned earlier in the call, we are looking at ways we know that we need to get recovery of the cost and the capital that we're spending to serve our customers, but we also recognize that significant increases when customers are hurting right now due to employment and economic difficulties associated with the pandemic. It was kind of a two battles against each other. So we tried to find a way to offset the balance in the near term and we were able to do that by taking a change in our tax position and we filed for these accounting changes to allow us to offset in the near term the impacts to the customers, while still being able to maintain the ability to earn our return on the capital that we've deployed to benefit our customers.

So we think that's creative, it does cost us some drag in the near term on our cash flow. But we believe that our financial strength is still strong enough that we'll be able to maintain our credit ratings and benefit our customers in the near term. And then presumably things will get better in the years to come and that will all even out. But that was our strategy and we think it makes sense to balance the -- getting the return for our shareholders while protecting our customers' bills.

Sophie Karp -- KeyBanc -- Analyst

Thank you. That's all from me.

Mark Thies -- Executive Vice President, Treasurer, and Chief Financial Officer

Thanks, Sophie.

Operator

Thank you. And I'm currently showing no further questions at this time. I'd like to turn the call back over to John Wilcox for any closing remarks.

John Wilcox -- Investor Relations Manager

I want to thank everyone for joining us today. We certainly appreciate your interest in our company. Have a great day.

Operator

[Operator Closing Remarks]

Duration: 23 minutes

Call participants:

John Wilcox -- Investor Relations Manager

Dennis Vermillion -- President and Chief Executive Officer

Mark Thies -- Executive Vice President, Treasurer, and Chief Financial Officer

Kevin Christie -- Senior Vice President, External Affairs and Chief Customer Officer

Richard Ciciarelli -- Bank of America -- Analyst

Brian Russo -- Sidoti -- Analyst

Sophie Karp -- KeyBanc -- Analyst

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