Avista Corp
NYSE:AVA
Earnings Call Analysis
Q4-2023 Analysis
Avista Corp
The company delivered a solid financial performance in the year 2023 with an increase in consolidated earnings to $2.24 per diluted share from $2.12 in the previous year, reflecting a growth of about 5.7%.
The year was marked by resilience in the face of operational challenges. A gas pipeline damage impacted roughly 37,000 natural gas customers, but the response was swift, with service being fully restored within a week. Cost recovery for the incident has been approved and is set for future regulatory proceedings. Additionally, Avista faced mechanical issues on a third-party pipeline and at a natural gas storage facility, leading to high commodity prices. The financial impacts of these elevated costs are being mitigated by various deferral mechanisms.
The company is advancing its clean energy and social responsibility goals, evidenced by four renewable natural gas supply contracts and partnerships with school districts towards fleet electrification. The 2023 corporate responsibility report highlights commitments to the environment, diversity, and social equity.
In a move demonstrating commitment to shareholder value, the Board increased the annual dividend to $1.90 per share.
Avista Utilities' earnings growth of over 35% and strong core operations in 2023 reflect the benefits of improved cost recovery from rate cases and effective cost management. The company has filed for rate increases in a 2-year general rate case in Washington for electric and natural gas, which is important for maintaining fiscal health in alignment with infrastructure exits and regulatory compliance.
With $146 million in available liquidity, Avista is maintaining a robust investment strategy. Capital expenditures were $485 million in 2023 at Avista Utilities and are expected to increase annually through 2026. The company also plans to issue $85 million in long-term debt and $70 million in common stock in 2024 to support these investments.
Looking ahead to 2024, the company projects a consolidated earnings range of $2.36 to $2.56 per diluted share, with Avista Utilities expected to contribute $2.23 to $2.39 per diluted share. Further, assuming a favorable outcome in the Washington general rate case, earnings are anticipated to grow at an annual rate of 4% to 6% from a 2025 base year.
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Hello, and thank you for standing by. Welcome to the Avista Corporation Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to Stacey Wenz. You may begin.
Good morning. I'm pleased to welcome you all to Avista's Fourth Quarter 2023 Earnings Conference Call. Our earnings and 2023 Form 10-K were released premarket this morning. You can find both on our website.
Joining me this morning are Avista Corp.'s CEO, Dennis Vermillion; President and COO, Heather Rosentrater; Senior Vice President, CFO, Treasurer and Regulatory Affairs Officer, Kevin Christie; and Vice President, Controller and Principal Accounting Officer, Ryan Krasselt.
Today, we'll 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-K for 2023, which is available on our website for a full discussion of these risk factors.
To begin, I'll recap the financial results presented in today's press release. Our consolidated earnings for the fourth quarter of 2023 were $1.08 per diluted share compared to $1.05 for the fourth quarter 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.
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.
This teamwork is core to Avista's values, and there are many examples I could point to. To touch on one, 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 third-party dig-in. Our people, along with mutual aid workers from 8 utilities spanning 8 states and contract employees worked 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 time frame is a testament to the determination and drive of our people and the people who came alongside of us to help. 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 cost 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. At the same time, 2 operational issues impacted our system and the natural gas system throughout 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.
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 9.7 million therms of natural gas annually for renewable sources. We're also partnering with school districts in our service carry to work toward fleet electrification and by the end of 2024, we expect to be working 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. The latest report includes progress updates regarding Avista'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 long-standing 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. 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 electric and gas, we've asked for increases in the first year of our plan of $77.1 million for electric and $17.3 million for natural gas. Colstrips 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 higher supply costs when netted with the changes resulting in the elimination of Colstrip costs results in a total request of $53.7 million in the second year of our plan for electric. On the natural gas side, we've asked for an increase of $4.6 million in the second 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.
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 demonstrates significant earnings growth of over 35% in 2023 when compared to 2022. As Dennis mentioned, this increase at Avista Utilities is largely the 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 $8.4 million compared to a pretax expense of $10.9 million in 2022.
AEL&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 and we are getting timely recovery of that investment. This is in part due to the multiyear rate plan structure in Washington, which allows us to place capital and 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 as a partial result of deferral mechanisms. We have been successful in developing with our commissions such as wildfire and insurance costs. We continue to focus upon additional regulatory mechanisms that improved recovery. To that end, in our Washington general rate case, we are requesting a modification to the ERM. We proposed a straight 95% customer, 5% company sharing of power supply costs. The ERM was introduced in 2002 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 million in 2023, 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 million in 2024, $525 million in 2025 and $575 million in 2026. Our planned expenditures for 2026 have increased $25 million, primarily due to projects planned for wildfire mitigation. AEL&P's capital expenditures were $14 million in 2023 and $21 million of capital expenditures are expected in 2024. We also invested $17 million in other investments during 2023 and we expect to invest $22 million in 2024.
On the liquidity front, as of December 31, we had $146 million of available liquidity under our committed line of credit and $30 million available under our letter of credit facility. We issued $112 million of common stock and $250 million of long-term debt in 2023. In 2024, we expect to issue approximately $85 million of long-term debt and $70 million 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. We expect the impact of the ERM on earnings to be negative during the first quarter of '24 in the 50% customer, 50% company sharing band. For the full year, we expect the ERM 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 '24 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.
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 '24 to more closely align with the results prior to 2023, with the first and fourth quarters representing the largest contributions to our annual earnings. We expect AEL&P 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 Instructions] Our first question comes from the line of Tanner James with Bank of America.
Just a quick one sizing the ERM and the ongoing support that updated bands might provide. What did the ERM 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 ERM encourage you to tighten the typical EPS guidance range you provide?
Yes. Thanks for the questions, Tanner. The -- I don't have the exact numbers off the top of my head here, but obviously, with ERM that was negative or a power supply costs, it was negative to the tune of $0.09. If we had a 95.5% mechanism in place, it would have shrunk that significantly. My off the comp 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.
And thank you for the disclosure of the wildfire-related increase to the CapEx.
For the cumulative T&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.
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 million or so and closer to $60 million in 2026.
Our next question comes from the line of Willard Grainger with Mizuho.
Maybe just a question on the financing plans. I see previously for 2024, you're guiding to about $60 million of equity, and it's come up modestly to $70 million. 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.
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. We've had changes in expenditures, a little bit higher run rate for winter given power supply costs and what have you.
Understood. And then maybe just one on -- kind of -- how are you thinking about I know you said weather has been challenging from an ERM 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 and the hydrology here? Or what's kind of the puts and takes to that if you can unpack that a little bit for us?
Sure. 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 plan, that would help offset the first quarter negative or...
And I also want to add that, of course, that assumes that we have a reasonable melt in our hydro and our snowpack add 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.
Our next question comes from the line of Brian Russo with Sidoti.
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 -- is it the 60 basis points of timing? Or is it the 70 basis points of structural?
Yes. The structural lag, Brian, can't change. It's in place because of rule of 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. Assuming we manage our costs, all of that would allow us to reduce that 60 -- majority of that 60 basis points.
So the way to look at your earnings trajectory in '25 versus 2024 is ROE improvement on a growing rate base, simplistically is that.
Yes. And assuming we continue to manage our costs appropriately, and we get that good regulatory treatment or constructive regulatory treatment.
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? And that just kind of ties into this, it looks like a $575 million run rate CapEx in '26 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?
Yes. The way I would 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.
And then on the transmission side, they're 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 near or -- and then when we think about transmission really across the entire region and perhaps the country, there's a longer-term opportunity or really a requirement if we're going to deliver all this clean energy to all the locations that needs to be delivered. And that takes quite a bit more time.
And then just a follow-up on the ERM. 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 ERM adjustment? And would you say that the adjustments you proposed puts you kind of on a more comparable level relative to your regional peers?
Yes. Good question. Yes, it was in the late 2000s. I think the last time we filed to adjust the ERM or we put in adjust the ERM -- and the -- we're watching closely, regional peers that there's been some change in power supply. We've been 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.
[Operator Instructions] I'm showing no further questions in the queue.
We do have a question from [ Allen Roche ].
I 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?
Yes. I mean with regard to the wildfire year, I think 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 and 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. And then with the other fire that's was north of 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. I mean we had to spend a little bit of money fixing all the stuff that was lost out on the West Plains there, but that's -- that was definitely manageable.
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?
Well, the 4 Snake River dams are federal projects and the power output from those facilities is managed by the Bonneville Power Administration, and we do not have any ownership stake or any offtake 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, but no direct impact to our company from removal of those facilities.
Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Stacey for closing remarks.
Thank you all for joining us today and for your interest in Avista. Have a great day.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.