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Edited Transcript of AVA earnings conference call or presentation 7-Aug-19 2:30pm GMT

Q2 2019 Avista Corp Earnings Call

SPOKANE Aug 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Avista Corp earnings conference call or presentation Wednesday, August 7, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* John Wilcox

Avista Corporation - IR Manager

* Kevin J. Christie

Avista Corporation - VP of External Affairs & Chief Customer Officer

* Mark T. Thies

Avista Corporation - Senior VP, CFO & Treasurer

* Scott L. Morris

Avista Corporation - Chairman & CEO

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Conference Call Participants

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* Andrew Levi

ExodusPoint Capital Management, LP - Portfolio Manager

* Christopher Ronald Ellinghaus

The Williams Capital Group, L.P., Research Division - Senior Equity Research Analyst of Power and Natural Gas

* Paul Patterson

Glenrock Associates LLC - Analyst

* Richard Jude Ciciarelli

BofA Merrill Lynch, Research Division - Research Analyst

* Sophie Ksenia Karp

KeyBanc Capital Markets Inc., Research Division - Research Analyst

* Vedula Murti

Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager

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Presentation

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Operator [1]

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Welcome to the Avista Corporation Second Quarter 2019 Earnings Conference Call. My name is Hilda, and I will be your operator for today. (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.

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John Wilcox, Avista Corporation - IR Manager [2]

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Thanks, Hilda. Good morning, everyone, and welcome to Avista's Second Quarter 2019 Earnings Conference Call. Our earnings were released premarket 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 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 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.

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Scott L. Morris, Avista Corporation - Chairman & CEO [3]

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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 we -- where we live better, stronger and more resilient. We'll infuse $7 million into our committees over the next 3 years. It's earmarked to focus on 3 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 why we're investing in initiatives that will set our youth on an exciting path for their future.

We know that we can accomplish great things when we partner with each other and I'm really excited about the possibilities. With regards to our quarterly earnings, we had a strong second quarter as our earnings benefited from lower operating costs and better-than-expected customer growth. These increases were partially offset by the donation commitment that I just spoke about. AEL&P was solidly above our expectations and expected to meet our full year guidance. At our other businesses, we completed the sale of our subsidiary METALfx in the second quarter, which resulted in about a $2.3 million gain, and we also had earnings from some of our other investments.

Regarding regulatory matters, in July, we were able to reach an all-party settlement in principle for the remaining issues of our natural gas general rate case in Oregon, and we expect to file this agreement later in August. In June, we filed an electric general rate case in Idaho and we continue to work through the regulatory process in Washington. We expect these cases to provide rate relief in early 2020 and begin reducing the regulatory lag that we've have been experiencing.

Based on the 2019 results to date, for the full year of 2019, we are raising our earnings guidance by $0.05 per diluted share to a consolidated range of $2.83 to $3.03 per diluted share. This includes $1.01 per diluted share for the termination fee receipt from Hydro One in the first quarter, which was partially offset by the payment of remaining transaction costs.

We're raising earnings guidance due to the gain of the sale of METALfx and earnings from investments at our other businesses. And now I'm going to turn it over to Mark.

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [4]

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Thank you, Scott. Good morning, everyone. I just want everybody to mark October 4 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 $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 '18. 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 $30 million higher capital. As Scott mentioned earlier, we're raising our guidance for -- to a consolidated range of $2.83 to $3.03 per diluted share, which is a $0.05 increase on both ends. And that increase includes the termination fee paid to Hydro One and the payment of transaction costs and we're raising the guidance primarily because the gain on METALfx is now known. Typically, we don't include those in guidance until they're known and included in our results and that occurred in the second quarter. Going forward, we continue to strive to reduce the regulatory timing lag and more closely align our earned returns with those authorized by 2022. To achieve this, we anticipate annual earnings growth of 9% to 10% from 2020 through 2022, with a return to normal 4% to 5% growth following 2022. And the earnings growth is calculated based on the midpoint of our original 2019 earnings guidance as the starting point, which I'll -- but also excluding the $1.01 termination payment from Hydro One. These growth rates really -- the only way we achieve those is if we get timely recovery in all of our jurisdictions from the rate cases that we've been filing and we expected to -- expect to file.

We expect Avista Utilities to contribute in the range of $2.72 to $2.86 per diluted share, again, including the $1.01 transaction cost. The midpoint of our guidance does not include any expense or benefit under the ERM. We currently expect that to be in the 75-25 sharing band, which is expected to add approximately $0.05 per diluted share.

Our outlook for Avista Utilities assumes, among other variables, normal precipitation, temperatures and below-normal hydroelectric generation for the remainder of the year. We're about 90% of hydro in our expectation for this year so we do include that in our expectations.

For 2019, we expect AEL&P to contribute in the range of $0.09 to $0.13 per diluted share and our outlook there again assumes, among other variables, normal precipitation and hydroelectric generation for the remainder of the year. The change in our guidance is we expect our other businesses to contribute earnings in the range of $0.02 to $0.04 per diluted share, an increase from $0.05 from previous guidance and again, due to the gain on METALfx sale as well as other investment gains from our other businesses. Our guidance generally includes only normal operating conditions and does not include unusual items or settlements or acquisitions and dispositions until the effects are known and certain. I will now turn the call back over to John.

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John Wilcox, Avista Corporation - IR Manager [5]

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And now we will open this call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have a question from Richard Ciciarelli from Bank of America Merrill Lynch.

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Richard Jude Ciciarelli, BofA Merrill Lynch, Research Division - Research Analyst [2]

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Can you hear me?

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [3]

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Yes, we can hear you.

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Richard Jude Ciciarelli, BofA Merrill Lynch, Research Division - Research Analyst [4]

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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.

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Kevin J. Christie, Avista Corporation - VP of External Affairs & Chief Customer Officer [5]

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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%.

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Richard Jude Ciciarelli, BofA Merrill Lynch, Research Division - Research Analyst [6]

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Okay. So no initial feedback in general thus far though?

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Kevin J. Christie, Avista Corporation - VP of External Affairs & Chief Customer Officer [7]

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No. We're really just talking about the process and the steps to move forward to implement.

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Richard Jude Ciciarelli, BofA Merrill Lynch, Research Division - Research Analyst [8]

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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...

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [9]

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The big change is due to the gain, so yes. 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.

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Operator [10]

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The next question comes from Paul Patterson from Glenrock Associates.

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Paul Patterson, Glenrock Associates LLC - Analyst [11]

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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?

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [12]

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Yes. 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 and 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 turn around, but we don't give guidance beyond the next year or 2. 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 will probably revert to a small loss.

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Paul Patterson, Glenrock Associates LLC - Analyst [13]

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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 your thinking about the tax rate in 2020 and beyond?

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [14]

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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's 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.

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Paul Patterson, Glenrock Associates LLC - Analyst [15]

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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?

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [16]

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Yes. Well so, yes. We were offsetting additional depreciation at coal strip. So really it had no earnings impact.

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Paul Patterson, Glenrock Associates LLC - Analyst [17]

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Okay. And just in general, we should be thinking 16% to 17%, roughly speaking, on a normalized basis going forward?

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [18]

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Yes.

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Operator [19]

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The next question comes from Sophie Karp from KeyBanc.

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Sophie Ksenia Karp, KeyBanc Capital Markets Inc., Research Division - Research Analyst [20]

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Can you hear me?

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [21]

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

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Sophie Ksenia Karp, KeyBanc Capital Markets Inc., Research Division - Research Analyst [22]

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Oh, is this better?

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [23]

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It's better.

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Sophie Ksenia Karp, KeyBanc Capital Markets Inc., Research Division - Research Analyst [24]

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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?

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [25]

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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.

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Sophie Ksenia Karp, KeyBanc Capital Markets Inc., Research Division - Research Analyst [26]

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So -- and -- so $1.01 and the $0.05 from METALfx?

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [27]

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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.

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Operator [28]

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The next question comes from Vedula Murti from Avon Capital.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [29]

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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.

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [30]

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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 onetime 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 depreciation accelerated in that to 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.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [31]

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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 serve or 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?

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Scott L. Morris, Avista Corporation - Chairman & CEO [32]

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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.

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Vedula Murti, Millennium Management LLC - Senior Analyst & Assistant Portfolio Manager [33]

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

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Scott L. Morris, Avista Corporation - Chairman & CEO [34]

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Yes.

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Operator [35]

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The next question comes from Chris Ellinghaus from Williams Capital.

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Christopher Ronald Ellinghaus, The Williams Capital Group, L.P., Research Division - Senior Equity Research Analyst of Power and Natural Gas [36]

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Can you give us any more color on the other nonregulated income that you discussed in the press release? And if you can, can you give us any kind of number on that?

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [37]

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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 $0.01 or $0.02 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.

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Christopher Ronald Ellinghaus, The Williams Capital Group, L.P., Research Division - Senior Equity Research Analyst of Power and Natural Gas [38]

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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 3-year period.

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [39]

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Well, the cash impact will be over 3 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.

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Christopher Ronald Ellinghaus, The Williams Capital Group, L.P., Research Division - Senior Equity Research Analyst of Power and Natural Gas [40]

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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?

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [41]

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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.

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Christopher Ronald Ellinghaus, The Williams Capital Group, L.P., Research Division - Senior Equity Research Analyst of Power and Natural Gas [42]

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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...

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [43]

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That's correct.

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Christopher Ronald Ellinghaus, The Williams Capital Group, L.P., Research Division - Senior Equity Research Analyst of Power and Natural Gas [44]

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Your thought process had changed at some point?

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [45]

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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.

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Christopher Ronald Ellinghaus, The Williams Capital Group, L.P., Research Division - Senior Equity Research Analyst of Power and Natural Gas [46]

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Okay. So that -- when you filed a notice of intent, you weren't sure what you were expecting there?

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [47]

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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 the ability to file a rate case to have the ability to get recovery by January 1 to be efficient.

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Christopher Ronald Ellinghaus, The Williams Capital Group, L.P., Research Division - Senior Equity Research Analyst of Power and Natural Gas [48]

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Right. Got you. Also, is it possible to give any color on the Oregon settlement prior to its filing?

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Mark T. Thies, Avista Corporation - Senior VP, CFO & Treasurer [49]

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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.

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Operator [50]

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(Operator Instructions) The next question comes from Andrew Levi from ExodusPoint Capital.

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Andrew Levi, ExodusPoint Capital Management, LP - Portfolio Manager [51]

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Just have a quick question. Just on the 2% cost cap, I'm just not familiar with that, if you could just explain that. That's my only question.

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Kevin J. Christie, Avista Corporation - VP of External Affairs & Chief Customer Officer [52]

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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.

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Andrew Levi, ExodusPoint Capital Management, LP - Portfolio Manager [53]

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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?

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Kevin J. Christie, Avista Corporation - VP of External Affairs & Chief Customer Officer [54]

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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.

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Andrew Levi, ExodusPoint Capital Management, LP - Portfolio Manager [55]

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Oh, you mean, like CapEx? Or the...

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Kevin J. Christie, Avista Corporation - VP of External Affairs & Chief Customer Officer [56]

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

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Andrew Levi, ExodusPoint Capital Management, LP - Portfolio Manager [57]

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So are you -- so -- but that's just for renewable, that's not overall though, right?

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Kevin J. Christie, Avista Corporation - VP of External Affairs & Chief Customer Officer [58]

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Yes. Correct. For the clean legislation.

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Operator [59]

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Mr. Wilcox, at this moment, we show no further questions. Do you have any final comments?

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John Wilcox, Avista Corporation - IR Manager [60]

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

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Operator [61]

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Thank you. Ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.