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Edited Transcript of AVA.N earnings conference call or presentation 24-Feb-21 3:30pm GMT

·35 min read

Q4 2020 Avista Corp Earnings Call SPOKANE Feb 25, 2021 (Thomson StreetEvents) -- Edited Transcript of Avista Corp earnings conference call or presentation Wednesday, February 24, 2021 at 3:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Dennis P. Vermillion Avista Corporation - CEO, President & Director * John Wilcox Avista Corporation - IR Manager * Kevin J. Christie Avista Corporation - Senior VP of External Affairs & Chief Customer Officer * Mark T. Thies Avista Corporation - Executive VP, CFO & Treasurer ================================================================================ Conference Call Participants ================================================================================ * Brian J. Russo Sidoti & Company, LLC - Research Analyst * Christopher Ronald Ellinghaus Siebert Williams Shank & Co., L.L.C., Research Division - Principal & Senior Equity Utility Analyst * Richard Jude Ciciarelli BofA Securities, Research Division - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to the Avista Corporation's Fourth Quarter 2020 Earnings Conference Call. (Operator Instructions) As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Mr. John Wilcox, Investor Relations Manager. Please go ahead, sir. -------------------------------------------------------------------------------- John Wilcox, Avista Corporation - IR Manager [2] -------------------------------------------------------------------------------- Good morning, everyone, and welcome to Avista's Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. Our earnings and our 2020 Form 10-K were released premarket this morning and are both available on our website. Joining me this morning are Avista Corp., President and CEO, Dennis Vermillion; Executive Vice President, Treasurer and CFO, Mark Thies; Senior Vice President, External Affairs and Chief Customer Officer, Kevin Christie; and Vice President, Controller and Principal Accounting Officer, 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 2020, which is 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 fourth quarter of 2020 were $0.85 per diluted share, compared to $0.76 for the fourth quarter of 2019. For the full year, consolidated earnings were $1.90 per diluted share for 2020, compared to $2.97 last year. Now I'll turn the discussion over to Dennis. -------------------------------------------------------------------------------- Dennis P. Vermillion, Avista Corporation - CEO, President & Director [3] -------------------------------------------------------------------------------- Well, thanks, John, and Good morning, everyone. As we begin 2021 continuing to work through the COVID pandemic, we hope you're staying safe and healthy. Looking back on the last year, I'm just so proud of our employees for navigating the challenges presented by the pandemic, continuing to provide energy like they always do to our customers and progressing our business plans forward. I would like to thank all of our employees for their dedication and determination throughout the last year. We continue to help those who are struggling and most in need in our communities. In 2020, Avista and the Avista Foundation provided more than $4 million in charitable giving to support the increased need for services that community agencies are still experiencing throughout the areas we serve. Financially, our earnings for 2020 were better than expectations, and Mark will provide further details here in just a few minutes. Operationally, we finished installing nearly all of our smart meters, electric smart meters, and natural gas modules across Washington in one of the largest projects in our history. The deployment of this infrastructure will provide customers with more real-time data so they can better manage their energy use. The technology enables us to proactively push high energy alerts to notify customers if they could exceed their preset energy budgets, which, of course, helps eliminate surprises when their bill arrives at the end of the month. Beyond generating bills, we're using the data from smart meters to run a more reliable and efficient power grid and to deliver a higher level of service for our customers. For example, we now have more visibility into our system, which allows us to detect and restore power outages more quickly. We also made strides to meeting our clean energy goals, as the Rattlesnake Flat Wind Farm went online last December. During its construction the project created clean energy jobs for our local communities, and now that it's completed, the project's 57 wind turbines will provide 50 average megawatts of clean, renewable energy for our customers at an affordable price. That's enough energy to power 38,000 homes for years to come. As wildfires continue to have an impact on our region, we implemented a new comprehensive 10-year wildfire resiliency plan that aims to improve defense strategies and operating practices for a more resilient system. We expect to invest about $330 million implementing the components of this plan over the life of the plan, which, as I said, was 10 years. We were proud to announce yesterday that Avista has been recognized again as one of the 2021 World's Most Ethical Companies by Ethisphere, a global leader in defining and advancing the standards of ethical business practices. This marks the second year in a row that Avista has achieved this distinction. We are only 1 of 9 honorees recognized in the energy and utilities industry based on their assessment. In 2021, 135 honorees in total were recognized, spanning 22 countries and 47 industries. We are honored to receive this recognition because it acknowledges our belief that integrating corporate responsibility into our business builds trust, forges lasting relationships, strengthens morale, reduces risk and delivers enhanced value to our shareholders and ultimately enables us to more effectively deliver on our vision to provide better energy for life. In January, we published Avista's 2021 Corporate Responsibility Report on our avistacorp.com website, and I urge you to check it out when you have some time. This content provides a broad look at our operations and how we're fulfilling our commitments to our people, our customers, our communities and our shareholders. The website also provides links to Avista's reporting on a series of industry and financial ESG disclosures. The updated content supports Avista's longstanding commitment to corporate responsibility and sharing this information with our stakeholders. Switching gears, with respect to regulatory filings, in January we filed 2-year general rate cases in Idaho. And as you know, in 2020, we filed general rate cases in Washington, and we continue to work through the regulatory processes in both of these jurisdictions. We take our responsibility to provide safe, reliable energy at an affordable price very seriously, and we work hard to make prudent financial investments in our infrastructure, manage our costs and identify ways to best serve our customers that contribute to keeping energy prices low. For example, our proposed tax customer credit would completely offset an immediate increase in electric and natural gas bills for our Washington customers. In Oregon, new rates went into effect on January 16 of this year, and we expect to file another rate case in the second half of 2021 in Oregon. Looking ahead, we remain focused on running a great utility and continue to invest prudent capital to maintain and update our infrastructure and provide reliable energy service to our customers. We are initiating our 2021, 2022 and 2023 earnings guidance, with consolidated ranges of $1.96 to $2.16 per diluted share for 2021; $2.18 to $2.38 in 2022; and $2.42 to $2.62 per diluted share for 2023. This puts us on track to earning our allowed return by 2023. Lastly, earlier this month the board increased our dividend by 4.3%, to an annual dividend of $1.69 per share, and the dividend increase approved by the board marks the 19th consecutive year the board has raised the dividend for our shareholders, and I believe it demonstrates the board's commitment to maximizing shareholder value. At this time, I'll turn this presentation over to Mark. -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [4] -------------------------------------------------------------------------------- Thank you, Dennis, and Good morning, everyone. We had low expectations coming into this year. No, not the company, the Blackhawks. And the Blackhawks have really started off pretty good, after a slow first 4 games. We've had 5 rookies score their first goals ever in the NHL. So pretty exciting times for all you hockey fans out there. For the company in the fourth quarter, Avista Utilities contributed $0.81 per diluted share, compared to $0.67 last year. Our earnings increased primarily due to higher utility margin and customer growth. Also in the fourth quarter, the Oregon and Washington Commissions joined the Idaho Commission to allow for the deferral of certain COVID-19-related expenses for possible future recovery. Additionally, Avista Utilities earnings were better than expectations, due to higher utility margin and lower income taxes, which were partially offset by higher operating expenses. With respect to COVID-19, as I mentioned earlier, we have now received accounting orders in each of our jurisdictions to defer the costs and benefits associated with COVID-19, and those will be addressed in future proceedings with each of those commissions. We expect a gradual economic recovery that will still have some depressed load and customer growth in '21. We expect that to start improving in the second half of '21, our economy. We do have decoupling and other regulatory mechanisms which mitigate the impacts of changes in load for our residential and certain commercial customers. Over 90% of our revenue, as you recall, is covered by regulatory mechanisms. As Dennis mentioned, we continue to be committed to investing the necessary capital in our utility infrastructure. We expect our capital expenditures in 2021 to be about $415 million, and at AEL&P we expect about $7 million and about $15 million in our other businesses. With respect to our liquidity, as of December 31, we have $270 million of available liquidity under our committed credit line at Avista Utilities. And in 2020, we issued about $72 million in stock in 2020. In '21, we expect to issue about $75 million of equity or stock and up to $120 million of long-term debt. As Dennis mentioned, we are initiating guidance not only for 2021, but also for 2022 and 2023. And as he mentioned those ranges, this is to get us back to earning our allowed return by 2023, and our guidance does assume timely and appropriate rate relief in each of our jurisdictions relative to the capital and expenses that we have going forward. We experienced regulatory lag during '20 and expect this to continue through the end of '22 due to our continued investment in infrastructure and our delayed filings. We again delayed last year, as we talked about with the pandemic, in Washington and Idaho. Dennis mentioned those earlier. We expect our cases in Washington and Idaho, along with new rates, to provide some relief in 2021 and begin reducing that regulatory lag. Going forward, we'll strive to continue to reduce that and closely align our returns to those authorized by '23. After '23, we expect to grow at 4% to 6% our earnings. Our '21 guidance reflects unrecovered structural costs estimated to reduce the return on equity by approximately 70 basis points. And in addition, our timing lag, which is what we're trying to reduce with rate cases, has reduced it by about 100 basis points. This results in expected return on equity for Avista Utilities of approximately 7.7% in 2021. We are forecasting operating cost growth of about 3% and customer growth of about 1% annually, which has slightly improved from prior numbers on the customer growth side. For 2021, we expect Avista Utilities to contribute in the range of $1.93 to $2.07 per diluted share, and the midpoint of our guidance does not include any expense or benefit under the ERM. Our current expectation for the ERM is in the benefit position within the 75% customer/25% company sharing band, which is expected to add $0.05 per diluted share. For 2021, we expect AEL&P to contribute in the range of $0.08 to $0.11 per diluted share. And our outlook for both Avista Utilities and AEL&P assumes, among other variables, normal precipitation and hydroelectric generation for the year. We expect a loss between $0.05 and $0.02 per diluted share for our other businesses as we continue to develop opportunities for the future. We'll spend a little bit of money in the next couple of years to continue to get those earnings up over the course of the next 5 years, and we look forward to those opportunities. They're both in our service territory and in funds. Our guidance generally includes only normal operating conditions and does not include any unusual or nonrecurring items until the effects are known and certain. So I'll now turn the call back to John. -------------------------------------------------------------------------------- John Wilcox, Avista Corporation - IR Manager [5] -------------------------------------------------------------------------------- And now we would like to open up this call for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Richard Ciciarelli from Bank of America. -------------------------------------------------------------------------------- Richard Jude Ciciarelli, BofA Securities, Research Division - Research Analyst [2] -------------------------------------------------------------------------------- Just the first one, can you speak to the progress in your rate case filings in Washington and Idaho? And I guess, what percentage of the revenue requirement ask are you assuming to get to the midpoint of your 2021 guidance range? -------------------------------------------------------------------------------- Kevin J. Christie, Avista Corporation - Senior VP of External Affairs & Chief Customer Officer [3] -------------------------------------------------------------------------------- Rich, it's Kevin Christie. As far as the rate case progress goes, we're really just underway in both cases. In Idaho, the most recently filed case, we have not established or have not seen the procedural schedule yet. That should happen in the next few weeks. The procedural schedule has been established in Washington, and we've been going through the discovery process thus far. We have our first settlement conversation coming up on March 10. As far as your latter question goes, what we typically see as constructive outcomes from a regulatory get-versus-ask perspective is in that 55% to 65% range. And again, we think we've spent prudent capital and would expect fair recovery from the regulators as we move forward. -------------------------------------------------------------------------------- Richard Jude Ciciarelli, BofA Securities, Research Division - Research Analyst [4] -------------------------------------------------------------------------------- Got it. That's very helpful. And I guess, just in terms of your forward-looking outlook for '22 and '23, your CapEx was relatively unchanged. Obviously, you have 2 rate cases now that sound like you're kind of in the early stages. I guess what gives you the confidence that you'll be able to earn closer to your allowed ROEs throughout the company, and how you plan on executing to kind of get there? Does that embed any multiyear rate plans or anything like that within the outlook? -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [5] -------------------------------------------------------------------------------- Well, so a couple of things on that. It does -- we do need to get fair results or reasonable results in our commissions and from our filings, but we also believe that we filed appropriate cases. We've got prudent capital we spent for our customers, and our costs are prudent as we go to serve our customers. We're catching up on timing lags. So we believe that we'll be able to catch up incrementally in the next couple of years, not all at once. We think that will take a couple of years. We did file a multiyear case in Idaho. We have a 2-year case in Idaho right now. And we would look, as we go forward, we'll go through. We looked at it for Washington but felt with everything going on with the pandemic and certain large projects, as Dennis mentioned, the AMI project, one of our largest projects in history, going into this case we didn't feel a multiyear made sense. So we filed a single-year. We can file multiyear in the future, and that can get us to where we need to be. And that's really what our plan is, is to put forward an appropriate case reviewed by the staff and the parties, but we believe we can get back to earning our allowed return. -------------------------------------------------------------------------------- Richard Jude Ciciarelli, BofA Securities, Research Division - Research Analyst [6] -------------------------------------------------------------------------------- Got it. That makes a lot of sense. And then you're talking about still the structural lag there of roughly 70 bps? -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [7] -------------------------------------------------------------------------------- Yes, we expect that. We've had that for a long time, and we just point that out. So yes, we expect that to be the case. -------------------------------------------------------------------------------- Kevin J. Christie, Avista Corporation - Senior VP of External Affairs & Chief Customer Officer [8] -------------------------------------------------------------------------------- Rich, going forward, we're working with the other parties that we typically work with in Washington, along with the commission and the other utilities, and there's a piece of legislation that's sitting in the Senate right now that's intended to help guide and actually require multiyear rate plans of at least 2 years and up to 4 years. And with that, if that were to move forward, we feel like it's a really constructive piece of legislation that would allow us to have that multiyear rate plan option -- I'm sorry, requirement, and it would help us get the first year right and the transitions from year-to-year right, as well. So that would be something we'd look towards the future after this particular case in Washington. -------------------------------------------------------------------------------- Richard Jude Ciciarelli, BofA Securities, Research Division - Research Analyst [9] -------------------------------------------------------------------------------- Yes, absolutely. That would be helpful. And then just the last one I had here was, I think that in your press release you mentioned looking at some strategic opportunities in 2021. Can you just describe what specifically you're looking at? You mentioned some increased costs there, as well. Just curious what... -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [10] -------------------------------------------------------------------------------- It's a nominal increase to costs, Rich. But we're looking -- some of that's just in the University District within Spokane. We continue to grow out our 5 smartest blocks in the eco-district; we're spending some dollars there. We're looking at a pilot on some opportunities in some regional communities that we think could have some opportunities for us. And we're also spending money in a couple of different funds that we've had consistent dollars in. So we expect those. They're nominal at this point from a cost perspective, but we think they have opportunities as we go forward. And they really go towards the innovative aspect of our company. We have a history of innovation. And so we spend those dollars because there are opportunities to help in the market. -------------------------------------------------------------------------------- Richard Jude Ciciarelli, BofA Securities, Research Division - Research Analyst [11] -------------------------------------------------------------------------------- Okay. This is all in the other businesses, not at the utilities, just to be... -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [12] -------------------------------------------------------------------------------- Right. It's still within our service territory, but it is outside of the utility business. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- (Operator Instructions) Our next question comes from the line of Brian Russo from Sidoti. -------------------------------------------------------------------------------- Brian J. Russo, Sidoti & Company, LLC - Research Analyst [14] -------------------------------------------------------------------------------- You mentioned an upcoming Washington IRP in 2021. Is that second half or fourth quarter? -------------------------------------------------------------------------------- Dennis P. Vermillion, Avista Corporation - CEO, President & Director [15] -------------------------------------------------------------------------------- I believe that's April. We'll have to check on that. We filed in Idaho last year and with a progress report in Washington. But to line up the sequencing with the new Clean Energy Transformation Act in Washington, that's why we did the progress report. I believe it's -- we can double-check that, but I believe it's here just in a couple of months. -------------------------------------------------------------------------------- Brian J. Russo, Sidoti & Company, LLC - Research Analyst [16] -------------------------------------------------------------------------------- Okay. I was just curious what can we expect from that. Pursuit of more PPAs when Colstrip is retired and the Lancaster PPA expires, I believe, in 2025? Or will there be any self-build scenarios in any competitive RFP, going forward? -------------------------------------------------------------------------------- Dennis P. Vermillion, Avista Corporation - CEO, President & Director [17] -------------------------------------------------------------------------------- You're right. Obviously, Colstrip will be leaving our portfolio in 2025 and then Lancaster a year later. So we will be in acquisition mode. We actually have an RFP for renewables out right now. And what we would expect to do, expect to acquire, and this is based on the IRP that we filed in 2020, I don't expect it to be a whole lot different in '21, but it will be a combination of generation plant upgrades, additional clean energy, renewables and storage, energy efficiency and demand response. So the way we would do this, ultimately, we want to meet our customers' needs in the most cost-effective way on a risk-adjusted basis, and reliability will be an essential design element of whatever we choose, but it would be a competitive process. Whether or not we have self-build options that make the cut or not, we'll just have to wait and see when we get there. But ultimately, the objective is lowest-cost, risk-adjusted basis to our customers. -------------------------------------------------------------------------------- Brian J. Russo, Sidoti & Company, LLC - Research Analyst [18] -------------------------------------------------------------------------------- Okay. And is the wildfire investment 10-year plan, is that included in this rate case? Or is that a separate docket to be approved? -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [19] -------------------------------------------------------------------------------- The wildfire, Kevin, do you want to talk about that? Is it included in this case? Or is it a separate docket? -------------------------------------------------------------------------------- Kevin J. Christie, Avista Corporation - Senior VP of External Affairs & Chief Customer Officer [20] -------------------------------------------------------------------------------- Let me go through both states. In Idaho, it was its own docket. It's been filed, approved, and it allows for a deferral mechanism that includes expense, depreciation and capital. In Washington, we filed it with, under a separate docket, though, with the latest GRC in Washington, and it was consolidated with our GRC. So that will play out over the length of those 11 months, or we would expect that to be the case. And then what that includes is for 2021 deferral of O&M. And then going forward, post rate effective period for the rate case of October 1, that would include both expense and capital. -------------------------------------------------------------------------------- Dennis P. Vermillion, Avista Corporation - CEO, President & Director [21] -------------------------------------------------------------------------------- Brian, we just checked. And the IRP, the next IRP in Washington will be filed in April of this year. So I was right on that one. -------------------------------------------------------------------------------- Brian J. Russo, Sidoti & Company, LLC - Research Analyst [22] -------------------------------------------------------------------------------- Okay. Great. And it looks like last year you issued $72 million of equity. I think you're planning approximately $75 million in 2021. Could you just talk about the balance sheet capacity relative to your Capex? And then the unique structure of this rate proposal with the tax credits that may pressure cash flows in the near term, just wondering what your target FFO-to-debt or debt-to-cap structure for credit rating purposes is? -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [23] -------------------------------------------------------------------------------- Well, again, our target is to maintain our current ratings. So we looked at that tax customer credit and looked at the impacts to our FFO and believe that we should be able to maintain our current credit ratings. It's just a short-term -- it's an interim rate relief. The rate relief is for a year, up to 2 years, depending on where we end up in each of those cases. But we then return to normal cash flows after that. So we don't believe we should have -- we might have a slight degradation in the current year post effective. So it would be '22 would be more where that would hit. But we don't believe it should change our ratings because we get right back quickly to having a normal cash flow from that. So we don't expect our ratings to be off, and we continue to raise the capital, the equity and the debt that we do, to maintain, to fund our capital expenditures. But the result is maintaining a prudent capital structure for regulatory purposes. So that's -- we believe that we will have that. Now we'll have to walk the rating agencies through that and go through that process as we normally do. But we've had a look at it and we've had an outside review of that as well, and we believe it shouldn't change our ratings. -------------------------------------------------------------------------------- Brian J. Russo, Sidoti & Company, LLC - Research Analyst [24] -------------------------------------------------------------------------------- Okay. Got it. And then you mentioned some legislation pending in the Senate in Washington allows for multiyear rate cases, et cetera. How does that triangulate with the Clean Energy Transformation Act that authorizes the commission a variety of tools in terms of up to 48 months of used and useful plant, earn a return on PPAs, et cetera? Is that something additional? Or does that take the place of CETA? Just want to clarify that. -------------------------------------------------------------------------------- Kevin J. Christie, Avista Corporation - Senior VP of External Affairs & Chief Customer Officer [25] -------------------------------------------------------------------------------- Good question, Brian. It's in addition to. CETA still exists as we know it, and all the facts and figures we've shared before apply. This just adds additional clarity to the commission's ability and focused on a multiyear. It's efficient, too, in the fact that many of the utilities are filing rate cases year after year, and this helps the commission get to a point where utilities are somewhat staggered for their cases because of the multiyear aspect. And it also provides clarity as far as what's included in getting that first year right and the transitions from year-to-year as well in. The utility has the option to file between 2 and 4 years if this legislation were to move forward. And again, that would give the commission the ability to make a determination based on those filings. -------------------------------------------------------------------------------- Brian J. Russo, Sidoti & Company, LLC - Research Analyst [26] -------------------------------------------------------------------------------- Okay. And I suppose the expectation is for that legislation to be passed, or not, in this legislative session. When does the legislation session end? -------------------------------------------------------------------------------- Kevin J. Christie, Avista Corporation - Senior VP of External Affairs & Chief Customer Officer [27] -------------------------------------------------------------------------------- Yes, that's correct. It might come out of the Senate this week, and then it would move over to the House. And then they would go through the normal process that transpires in Washington. So it should be by the end of the session, if not before, if it moves through. -------------------------------------------------------------------------------- Brian J. Russo, Sidoti & Company, LLC - Research Analyst [28] -------------------------------------------------------------------------------- Okay. And just a follow-up on an earlier question. Is the expectation that you'll file a second Washington rate case to include either what's in CETA or what's in this legislation for new rates to close that regulatory gap beginning in 2023? Or with the constructive rate case outcome in the pending case, that gets you there? -------------------------------------------------------------------------------- Kevin J. Christie, Avista Corporation - Senior VP of External Affairs & Chief Customer Officer [29] -------------------------------------------------------------------------------- We'll need to file -- we'll likely file in the first part of next year. And if this legislation moves forward, and even if it doesn't, we may still move forward with a multiyear. And that would include all the capital that's being spent now that is not in the current case. -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [30] -------------------------------------------------------------------------------- And that's for Washington, Brian. Because Idaho, our filing is a 2-year case. -------------------------------------------------------------------------------- Brian J. Russo, Sidoti & Company, LLC - Research Analyst [31] -------------------------------------------------------------------------------- Yes, correct. Just the multiyear guidance and the losses you're incurring in the other businesses this year, is there an expectation for the losses to reverse and start generating positive earnings and/or monetizing some of the investments through the multiyear guidance period? -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [32] -------------------------------------------------------------------------------- Well, in the multiyear, we didn't break out our guidance and I'm not going to break out right now, between the Avista Utilities, AEL&P and other for '22 and '23. We gave consolidated guidance. But we have said in the past, and we stand by that, that's why we're making the investments we're making, is that we expect -- we started, I think, in 2019 to say that in 3 to 5 years we expect to start making earnings out of that, $0.05 to $0.10 of earnings. And we still believe that we're going to do that. So probably by the '23/'24 time frame we're looking to have earnings in those other businesses. And when we come out with specific guidance on that, we will put that in there, but we do have that expectation and that's why we continue to invest dollars in those areas. -------------------------------------------------------------------------------- Brian J. Russo, Sidoti & Company, LLC - Research Analyst [33] -------------------------------------------------------------------------------- Right. I get it. So the way to think about it is the $15 million you're investing this year, the expectation is you'll earn some sort of return on that $15 million over the next several years? -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [34] -------------------------------------------------------------------------------- Well, some of them are new businesses. Like, as we're investing in the University District, some of those may not make a return for several years but come in after that, and others may make returns sooner than that. It's not -- you're not buying a bond, where you're going to get a return every year on it. These are start-up investments, and they take some time. Some are quicker than others. And we've seen earnings come out of the fund investments that we've made already and turn around pretty quickly, and we've seen others that will be longer term. So it's a balance there, Brian. It will just take some time. I don't have specifics for you on that. When we come out with our guidance in those forward years, we'll lay out. But we do expect, as you're looking at it, by '23 or '24 to start generating earnings from those businesses. -------------------------------------------------------------------------------- Brian J. Russo, Sidoti & Company, LLC - Research Analyst [35] -------------------------------------------------------------------------------- Okay. And then once again you're expecting to be in the 75%/25% sharing on the ERM, which I think you've been in a benefit for every year for the last 4 or 5 years, at least. What's driving that ERM this year relative to last year? Is it just -- and then that would be a segue into a second question on what's your current outlook on hydro [gens], given the weather patterns that we've seen in the Pacific Northwest and what's expected over the next couple of weeks or months. -------------------------------------------------------------------------------- Dennis P. Vermillion, Avista Corporation - CEO, President & Director [36] -------------------------------------------------------------------------------- Brian, this is Dennis. I think the things that have been driving the ERM over the last several years have been a combination of a couple of things. One is just lower gas prices, in general, from what we have seen before. And then, also, our team's ability to optimize or manage our resources efficiently. So it's a combination of those things continuing that I think put us in a real good position to be in the benefit in the ERM for this year. Now obviously, future looking, if we saw a dramatic run-up in natural gas prices, things might change on that. But as long as gas stays where it is, we're sitting pretty good. And then your second question, hydro. Here we are. It's mid-, almost the end of February. So we still have a couple of months really left of snow-build opportunity in the mountains. Right now we're just expecting, on a forward look, normal. And then as it sits today, the Northwest River Forecast Center runoff for water supply, runoff forecast for April through September is basically average for us, or 100%, plus or minus, just a little bit, based on the different basins. But generally speaking, we're expecting normal hydro at this point in time, going forward, for this year. -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [37] -------------------------------------------------------------------------------- And remember, Brian, the importance of temperatures and how quickly it melts. That's always -- we may have snow in the mountains. If it melts really fast, that's bad. If it's a long, cold spring and it melts off slowly, that's really good, anywhere in between. Like Dennis said, we expect normal because we have good snow pack, but there is -- you do have to also see how that comes off. -------------------------------------------------------------------------------- Brian J. Russo, Sidoti & Company, LLC - Research Analyst [38] -------------------------------------------------------------------------------- Right. Of course. You want average temperatures in that April and May time frame. -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [39] -------------------------------------------------------------------------------- Right. And that's what we assume in our expectations. -------------------------------------------------------------------------------- Brian J. Russo, Sidoti & Company, LLC - Research Analyst [40] -------------------------------------------------------------------------------- And that's what you're seeing today in the marketplace. -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [41] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Brian J. Russo, Sidoti & Company, LLC - Research Analyst [42] -------------------------------------------------------------------------------- Okay. And then, just lastly, just curious, interest rates have been rising lately, and there's concerns with inflationary pressures. How does it impact, number one, maybe the timing of your 2021 financing plans on the debt side and then that 3% O&M expense growth that you mentioned earlier as part of the 2021 assumption? Just curious what your thoughts are there. -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [43] -------------------------------------------------------------------------------- Well, with respect to the O&M growth, we continue to always look at trying to manage our costs. We put a number out there, and then can we try to come in inside of that. We work to that to the extent we can. But we wanted to put our expectations that's where we are, because we've seen some higher costs in insurance costs and pension costs and other costs have gone up. And then we need to continue to work to manage those. But that's our assumption and we want to put that out there. With respect to interest rates, yes, they have come up some, but they haven't changed significantly. And we're looking at doing 30-year debt, and we've hedged some of that. We're not trying to time the market to the last amount. The Fed chair was just testifying in front of Congress yesterday and today, and we expect him to continue to say that “we expect to keep rates low”. So we're not moving -- we're continuing to monitor that, and if it make sense, we'll look at doing our debt a little bit earlier. But right now, we don't think that makes sense, and we would expect to come out like we always have and do it in the second half of the year. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- Our next question comes from the line of Chris Ellinghaus from Siebert Williams. -------------------------------------------------------------------------------- Christopher Ronald Ellinghaus, Siebert Williams Shank & Co., L.L.C., Research Division - Principal & Senior Equity Utility Analyst [45] -------------------------------------------------------------------------------- The $75 million kind of run rate you've been at on equity, can we assume that that's what you've got built in through this sort of guidance period? -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [46] -------------------------------------------------------------------------------- We've had a history of issuing at that level, and we're not changing our CapEx. The only changes will be cash flow. So we don't give guidance forward with that, but that's been our historical expectations for issuing. -------------------------------------------------------------------------------- Christopher Ronald Ellinghaus, Siebert Williams Shank & Co., L.L.C., Research Division - Principal & Senior Equity Utility Analyst [47] -------------------------------------------------------------------------------- Okay. You didn't say anything about the dividend payout. Can you just address that? -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [48] -------------------------------------------------------------------------------- Well, the dividend payout has been the same since we started having some lag. We've said we're going to continue our dividend, and we will get to -- our stated guidance is to get to 65% to 75%, but we won't get there until we're back to earning our allowed return. So we'll run a little high right now, and we'll have our earnings growth. As you see the guidance ranges, the growth is greater than the dividend increase, which was 4% to 5% on the dividend, as Dennis mentioned; 4.3%, I think it was. So the earnings growth is greater than that, which will get us back in line with our stated 65% to 75% payout ratio as we get to earning our allowed return. -------------------------------------------------------------------------------- Christopher Ronald Ellinghaus, Siebert Williams Shank & Co., L.L.C., Research Division - Principal & Senior Equity Utility Analyst [49] -------------------------------------------------------------------------------- Sure. What was the increase in bad debt expense last year? -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [50] -------------------------------------------------------------------------------- I want to say $6 million or $7 million. -------------------------------------------------------------------------------- Christopher Ronald Ellinghaus, Siebert Williams Shank & Co., L.L.C., Research Division - Principal & Senior Equity Utility Analyst [51] -------------------------------------------------------------------------------- Okay. And you did mention that you're expecting the pandemic to continue to be a drag through the first half of the year. Can you give us any color on what you think that looks like for this year? -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [52] -------------------------------------------------------------------------------- I'll just say the color is it's included in our forecast. It's really -- you're going to see some load expectations as we've seen it, but we're decoupled largely, as I mentioned in my earlier comments. So the undecoupled load is an impact. And then to the extent that bad debts are there, but we have deferral mechanisms, as we mentioned, in each of our jurisdictions to be able to defer that and then go after recovery through a future proceeding. Now if that proceeding comes up differently, we'll have to address it, but our expectation is those are costs that we should recover through those future proceedings. -------------------------------------------------------------------------------- Christopher Ronald Ellinghaus, Siebert Williams Shank & Co., L.L.C., Research Division - Principal & Senior Equity Utility Analyst [53] -------------------------------------------------------------------------------- So with the deferrals and with the decoupling, you're basically not expecting it to be terribly big. -------------------------------------------------------------------------------- Mark T. Thies, Avista Corporation - Executive VP, CFO & Treasurer [54] -------------------------------------------------------------------------------- That's our expectation, and it's included in our guidance. -------------------------------------------------------------------------------- Christopher Ronald Ellinghaus, Siebert Williams Shank & Co., L.L.C., Research Division - Principal & Senior Equity Utility Analyst [55] -------------------------------------------------------------------------------- All right. One last thing. Dennis, can you give us your thoughts on the electrification bill in Washington? -------------------------------------------------------------------------------- Dennis P. Vermillion, Avista Corporation - CEO, President & Director [56] -------------------------------------------------------------------------------- Good question, Chris. First of all, I guess what I would say is we support reducing emissions. And obviously, with what we're doing on the electric side of things we're doing that and making good progress. But we need to do it in a manner that minimizes the cost burdens on our customers and avoids or protects, I guess, I would say, the reliability of the regional energy systems. And just I think we need to be doing it in a holistic fashion to minimize the unintended consequences. So having said all that, the bill doesn't really fully consider all these broad impacts. Now I am happy to say that we have been working with our fellow utilities in Washington state and other stakeholders in really trying to educate legislators as to the serious concerns that we have with the bill and the serious impacts that we believe the bill would have on our customers and the energy system. So I'm pleased to report that our efforts have led to defeat of the bill early in the legislative session. So that's good. So it's basically done for this year. However, obviously, we can expect that some components of it or the bill will come back at some point in time in the future. And we just need to continue to educate legislators as to what our point of view is; and that is, again, we believe strongly that natural gas plays an important role as we decarbonize our energy system. And I'm not saying that to give natural gas a pass. We're working on plans for renewable natural gas. We're experimenting with other technologies, we're investigating other technologies. And energy efficiency is an important component to that, as well. So we're going to do our part on the gas side as well, but we just are really concerned with the effects of electrification, not only what it would do for our customers from an affordability perspective, but what the implications are on our electric system. Our studies have shown that it would require a doubling of electric infrastructure, including generation, to meet the increased needs from a full electrification in our system. And there's obviously reliability and cost impacts associated with that, that are concerning. So that's kind of where we sit on this right now. And what we're going to do is spend the next -- we'll continue to work on educating stakeholders as to why gas makes sense, going forward. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- (Operator Instructions) And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to John Wilcox for any further remarks. -------------------------------------------------------------------------------- John Wilcox, Avista Corporation - IR Manager [58] -------------------------------------------------------------------------------- I want to thank everyone for joining us today. We certainly appreciate your interest in our company. Have a great day. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.