Good day. Thank you for being with us, and welcome to the Avista Corp. Q2 2021 Earnings Conference Call. I would now like to turn the call over to our speaker today, John Wilcox. Thank you. Please proceed.

Good morning, everyone, and welcome to Avista's Second Quarter 2021 Earnings Conference Call. Our earnings were released pre-market this morning and are available on our website. Joining me this morning are Avista Corp. President and CEO, Dennis Vermillion; Executive Vice President, 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 we 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 and 10-Q for the second quarter of 2021, 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 2021 were $0.20 per diluted share compared to $0.26 for the second quarter of 2020. For the year-to-date, consolidated earnings were $1.18 per diluted share for 2021 compared to $0.98 last year. Now I'll turn the discussion over to Dennis.

Well, thanks, John, and good morning, everyone. I hope your summer is going well and that you're staying safe. On June 30, Washington State officially lifted most of the remaining restrictions that have been in place during the pandemic. We're excited to see our local economies continue to recover. We're experiencing increased loads, and customer growth is steady. Like many other businesses, we continue to monitor the pandemic very closely and watch what's happening with variants and case counts in our communities. We're ready and able to successfully adjust our business as needed and also continue to provide care and compassion for those who are struggling. Now let's look at some highlights from our second quarter. We had a challenging second quarter, which included an unprecedented heat wave that brought with it several consecutive days of triple-digit record-breaking temperatures across the region. On June 29, Spokane temperature soared to 109 degrees, setting a new record high temperature and was even higher in many of our neighborhoods. That same day, Avista experienced a major increase in customer usage, which resulted in the highest energy usage in our company's 132-year history. The intense temperatures, combined with record high usage, strained parts of our electrical system and caused some of the equipment that runs our electric grid to overheat. Six of our 140 distribution substations were impacted. To prevent the equipment from overloading and to avoid extensive and costly damage to our electric system, we implemented protective outages for customers served by the equipment that was most impacted by the heat. Over the course of the event, we were able to reduce the impact on customers through system modifications. We appreciate our customers' patience for those who experienced outages. Higher customer loads, related to the extended heat wave, were the primary driver for an increase in net power supply cost to serve our customers, which negatively affected the Energy Recovery Mechanism, or ERM. Overall, we've experienced hotter and drier-than-normal weather across the Pacific Northwest, which contributed to lower-than-normal hydroelectric generation and increased power prices. For these reasons, we had to rely on thermal generation and purchased power at higher prices to serve those additional loads. As a result, Avista Utilities' earnings were below expectations for the second quarter. AEL&P's earnings met expectations in the second quarter, and they are on track to meet the full year guidance. It was a strong quarter for our other businesses, which exceeded expectations due to gains on our investments and the sale of certain subsidiary assets associated with the Spokane steam plant. Wildfire resiliency continues to be a focus for Avista. Our region has experienced extremely dry conditions all spring and summer. And combined with high temperatures, wildfire risk is high. In response to these conditions, Avista has been operating in what we call dry land mode since late June, and dry land mode decreases the potential for wildfires that could occur when reenergizing a power line. Normally, under normal conditions, these lines, located in rural and/or forested areas, are generally reenergized automatically. However, during the current dry weather conditions, Avista's line personnel physically patrol in outage areas before a line is placed back into service. This can require more time to restore service, but it decreases potential fire danger. This practice aligns with Avista's wildfire resiliency plan, which was released last year, building on prevention and response strategies that have been in place for many years. Avista has committed to a comprehensive 10-year wildfire resiliency plan that includes improved defense strategies and operating practices for a more resilient system. In regards to regulatory matters, we are pleased to have reached an all-party settlement in our Idaho general rate case. The new rates are fair and reasonable for our customers, the company, and our shareholders and will allow Avista to continue receiving a fair return in Idaho. Our Washington general rate cases continue to work their way through the regulatory process. Our hearings have been held, and we expect a decision by the end of September. In Oregon, we expect to file a rate case in the fourth quarter of 2021. We are confirming our 2021 earnings guidance with a consolidated range of $1.96 to $2.16 per diluted share. While we are confirming our consolidated range, we are adjusting our 2021 segment ranges to lower Avista Utilities by $0.10 per diluted share and raise other by $0.10 per diluted share. For 2022, we are lowering consolidated earnings guidance by $0.15 per diluted share to a range of $2.03 to $2.23 per diluted share. For 2023, we are confirming our earnings guidance with a consolidated range of $2.42 to $2.62 per diluted share. Although we expect to experience headwinds in 2022 from regulatory lag, we are confident that we can meet our earnings guidance for 2023 and earn our allowed return. Looking ahead, we'll continue focusing on our utility operations while prudently investing in the necessary capital to maintain and update our infrastructure to provide safe, reliable, and affordable energy to our customers and our communities. Now I'll turn this presentation over to Mark.

Thank you, Dennis, and good morning, everyone. I know many of you are eagerly anticipating the Blackhawks' next acquisition, which is a Spokane native. We’ve signed Tyler Johnson, a two-time Stanley Cup Champion, who hails from Spokane. We're thrilled about that. As Dennis mentioned, we are reaffirming our earnings guidance for 2021, adjusting our utility guidance for '21 and '22 downward, while confirming our consolidated guidance for '23. Our guidance assumes timely and appropriate rate relief in our jurisdictions, which is essential. We’ve settled our Idaho case and are awaiting approval from the commissions, which we expect to receive before rates take effect on September 1. For 2021, we anticipate Avista Utilities to contribute between $1.83 and $1.97 per diluted share. The lower end of our guidance for '21 and '22 is mainly due to increased regulatory lag resulting from higher capital expenditures driven by growth and a higher-than-expected depreciation expense. We consider this to be a matter of timing, and as we plan for our next Washington general rate case to be submitted early in the first quarter of '22, we expect it will be a multiyear rate plan required under new legislation. We aim to include all capital investments through the rate plan period to achieve our allowed return by 2023. Additionally, we have seen an increase in both actual and forecasted net power supply costs. Although the midpoint of our guidance range does not factor in any benefits or expenses under the ERM in Washington, the rise in power supply costs has limited our chances of achieving the upper half of the guidance range. We currently expect the ERM to indicate a surcharge position within the 90-10 company sharing band, which is predicted to decrease earnings by $0.08 per diluted share. In the previous quarter, we estimated that the ERM would be beneficial, adding $0.06 per diluted share. We also face rising net power supply costs under the PCA in Idaho. For 2021, as Dennis indicated, we expect AEL&P to contribute between $0.08 and $0.11. We have adjusted the range for our other businesses upward by $0.10, which compensates for the utility reduction, largely due to investment gains and revenue from the sale of Spokane Steam Plant, estimated at $0.05 to $0.08 per diluted share. Our guidance primarily reflects normal operating conditions and excludes unusual or nonrecurring items until their effects are confirmed. Moving to second quarter earnings, Avista Utilities' contribution was $0.11 per diluted share compared to $0.26 in 2020. Earnings decreased year over year due to an increase in net power supply costs, largely driven by higher customer demand from the heat wave, coupled with lower-than-normal hydroelectric generation due to hot and dry conditions. Our hydroelectric generation stands at about 91% of our forecasts for this year. The ERM in Washington saw a significant shift, resulting in a pretax expense of $7.6 million in Q2 of '21, compared to a pretax benefit of $0.4 million in 2020. Year-to-date, we've recorded $3.3 million in expenses in '21 against a $5.6 million benefit in 2020. In addition to elevated power supply costs, our operating expenses also rose due to the timing of maintenance projects that were postponed in 2020 due to COVID-19. In 2021, we resumed our original maintenance schedules in the second quarter. Higher maintenance costs were somewhat mitigated by a decrease in bad debt expenses as we continue to defer these through COVID-19 regulatory deferrals. Regarding capital, as Dennis noted, we remain dedicated to investing in our utility infrastructure. We now expect Avista Utilities’ capital expenditures to reach up to $450 million in 2021 and $445 million in 2022. This reflects increases of $35 million in '21 and $40 million in both '22 and '23 to support ongoing customer growth. Our customer growth is approximately 1.5%, an increase from the prior expectation of 0.5% to 1%. We plan to issue about $140 million in long-term debt and $90 million in common stock, including $16 million already issued through June 2021, to finance these increased capital expenditures. Now, I’ll turn the call back to John.

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

And your first question comes from Kody Clark from Bank of America.

It's actually Kody Clark on for Julien. So a couple of questions here. I guess first, on the guidance reduction in '22. I'm wondering if there's anything else that's driving that outside of just greater regulatory lag and power supply costs? I mean, it seems like those factors wouldn't drive that much of a delta. Are you making any assumptions on the Washington rate case that's contributing to that dynamic? Or are you seeing any increased insurance costs just on the wildfire side?

There are some additional nominal costs, but the primary factors we've emphasized are related to power supply. A significant portion is due to depreciation and timing issues. Some costs are also linked to our capital investments, particularly in shorter-lived assets that weren't included in the current case. We still anticipate a favorable outcome in our existing case, but as we progress in our capital expenditures and the nature of the capital we observe, it will likely affect our next case, which we plan to file early in the first quarter. Our expectations for a fair outcome in the current Washington case remain unchanged, and the key drivers are mainly additional capital from growth and depreciation, along with a few other minor factors.

Got it. And then just on '23 guidance, I guess, all else equal, you're investing more in '21 and '22, and then you're going to file that case in early '22, but you kind of reaffirmed that guidance range for '23 and also stated that you're still assuming that you're going to get to your authorized in '23. So I'm just kind of wondering what's contributing to your reaffirmation of that '23 guidance range? I guess from my perspective, it should be a little bit higher but...

No, it wasn't a significant move. The capital assets over long lives have some impact, but it's not a significant impact. So we're still within the range. Rather than just moving it a few cents, we decided to maintain our range. We want to have the confidence that we will return to earning our allowed return on the capital that we deploy, and that will be within that range. The capital move wasn't significant enough to change it. There is improvement, and it's positive, but it wasn't enough to alter our range for '23.

And your next question comes from the line of Sophie Karp from KeyBanc.

So maybe to build on the previous question a little bit here. So you're talking about increased regulatory lag that's partially due to higher CapEx, I suppose, in 2022. Are you correspondingly increasing your CapEx outlook? Or maybe I'm missing it here somewhere?

Are you asking if we are increasing our CapEx outlook? That is impacting our...

Yes, yes.

Yes, we are increasing our CapEx outlook. We are raising it to $450 million for this year and $445 million for 2022 and 2023. This is an increase from the previous $415 million and $405 million for the previous years. The increases are $35 million, $40 million, and $40 million respectively. This change is mainly due to the rising costs of executing the same projects we have, as material costs have increased. We believe these projects are very important for our customers, and this growth is beneficial for the company as well. It's not a fundamental change; we are not adding any new power plants or major projects; it is simply additional capital to continue our essential operations.

Got it. So okay. That's very helpful color. And so then could you maybe give us a little bit more color on the guidance revision on the other segments this year for 2021. So that goes from negative 5% to 2% to positive 5% to 8%, kind of a little bit more color on what accounts for that would be?

Our strong earnings in the second quarter were largely due to investment gains from the funds we are involved with, especially Energy Impact Partners, as well as the sale of the Steam Plant. Additionally, there was a small gain from the sale of the Steam Plant Square. This performance is reflected in our actual results, and as we look ahead, we do not anticipate significant additional gains. The outlook is primarily based on the results we achieved during the quarter.

Yes. Do you disclose what you have on those funds? Is it kind of similar to energy venture portfolios that some of your peers have?

I don't know the specific investments of our peers. However, we do not disclose the individual investments of our fund, only that we have invested in Fund I and Fund II, each with a commitment of $25 million. We are continuously investing in those funds. Additionally, we expect to invest about $15 million in our other businesses in 2021 and I believe also in 2022.

Got it. Got it. Okay. And then before I pass it on, maybe on the power supply situation, so clearly, I understand hydro was an issue. How do you think this is going to stack up in the second half? Is hydro going to become less of a factor in the second half? Maybe if you can give us some color on that? And also remind us how the mechanism kicks in here.

When we provide our estimates and mention a $0.08 negative surcharge position, that reflects our outlook for the year, including our hydro expectations. We anticipate normal hydro conditions during the fall and winter, though typically we don't expect much rain in the summer and fall. However, we do expect normal conditions for the rest of the fall and into winter, which could introduce some variability. Most of the variability usually arises during runoff. The heat earlier in the year led to reduced water availability, causing our hydro output to decline. Currently, we're at 91% for the year, which translates to about a 50 average megawatt impact. While we may see adjustments moving forward, we base our forecasts on the current conditions, so any variations would need to deviate from that.

Got it. And so your ability to recover those costs is basically limited by the rate structure there, correct?

The ERM reflects our power supply costs. If the prices of natural gas and our load requirements along with hydro conditions fluctuate, that will affect us, but we are currently at a 90% to 10% ratio. If conditions worsen, we will only experience a 10% impact. However, this does significantly affect our customers, who are at 90%.

Your next question comes from the line of Vedula Murti from Hudson Bay Capital.

A couple of things. I guess, one, in terms of 2022, you've indicated about depreciation and regulatory lag, but you also referenced power costs. So is there like an ERM negative that you're incorporating for 2022 that we ought to be aware of?

Well, the power costs actually reset in our rate cases. So when we come out and give '22 guidance, we will put that expectation in, but our power costs will reset in our rate case, which in Washington, which we expect to be effective October 1. Again, we still need commission approval and all that in order, but we expect that to be effective October 1. In that case, we expect to reset power supply costs, and then we will have a forward look at what impact that could have in our '22 expectations.

It seems accurate to say that the downward revision for 2022 is not related to costs, but rather to higher capital expenditures and plant and service that are not yet included in rates.

Correct. There are some minor impacts. Minor. It's really depreciation and capital.

Okay. In terms of equity, you're up to 90. I heard you've done 1-6, 16, such that there's like a 74 left to do?

Correct.

Okay. Now given the elevated capital going forward, is $90 million now a better level on an annual basis? If I recall properly, we were at $50 million on an annual basis kind of every year going forward. Is now $90 million the new number?

We've typically been in the range of $50 million to $75 million on average over the past several years. I don't recall the exact figures. It will depend on our cash flows because our operating cash flows also help to offset our equity needs. We expect to be within our normal ranges, adjusted for the additional capital expenditures. A reasonable assumption would be to consider a split of $20 million between the additional amounts of $40 million to $45 million added to our historical levels. While it's uncertain that we will definitely reach $90 million, it's a possibility we will explore, and we will provide guidance when we release our forecasts in the coming years.

Okay. Because I guess that you would still be kind of like in a range where needing to do any type of a block or a public type thing as opposed to your various stock plans and ATM type of program that still looks to be sufficient?

Absolutely. The current ATM program that we have with four banks would be sufficient to cover any of our equity needs, we believe. That doesn't mean we don't have the opportunity to do a block under that agreement, but typically, we do it under that program.

Okay. I remember that in previous discussions about increasing capital expenditures and addressing system issues, the $400 million level seemed to align with the appropriate increase in costs for customers. Now I'm curious if the rise in capital expenditures is putting pressure on that balance, as it seems to contradict what has been discussed over the past 18 to 24 months.

We've been at the $405 million mark for many years, possibly eight or nine, and I can't recall the exact year we reached that level. Considering this, we evaluated our situation and recognized the need to invest in our new wildfire resiliency plan, which requires capital over the next decade. Our growth capital has increased as we've added more customers and are entering the energy imbalance market. Therefore, we have various needs beyond our standard capital requirements, which led us to decide that now is the right time to manage and slightly increase our capital spending. We believe a 10% increase is reasonable while keeping in mind the cost pressures and affordability for our customers. Our regulatory filings indicate we have over $500 million in projects we could invest in each year. Despite the addition of new projects, we aim to keep our capital spending at a responsible level, and now we feel it is time to raise it to $445 million over the next few years.

And with the 1Q '22 rate filing, can you talk a little bit about the multiyear abilities and some of the other facets that legislation provided you? And how you are thinking about using those to be able to collapse the regulatory lag for '23 and be able to earn whatever return it is?

You bet. This is Kevin Christie. I wanted to explain that starting in 2022, we are required to file a multiyear rate plan that can last anywhere from two to four years. The legislation that allows for this multiyear rate plan also establishes a process to ensure the first year is done correctly. This involves capital spending, which we believe is prudent, and managing transitions from year to year. I can't confirm how long our rate plan will be; it depends on the outcome of the current case that Mark mentioned, and we anticipate an order before October 1. The legislation allows us to secure necessary capital up to the effective date of the new rates, and we'll adjust based on capital expenditures in the following years.

And one last question. Can you remind me that there are structural items that simply cannot be recovered, so if you're providing a headline number for authorized return, there will be a certain number of basis points below it because they are fundamentally not allowed. I'm trying to remember if it's about 70 basis points or something like that, which has been a consistent regulatory policy for you in Washington?

You're correct, Vedula. Our expectation is 70 basis points. This is primarily due to costs that cannot be recovered from customers.

We do have another question from Kody Clark.

Kody here again. Just a couple of very quick follow-ups. So just wondering if you could share what you're assuming in terms of earned ROE for '21? I think previously, you pointed to 7.7%, but wondering if that's updated with the guide here?

We're off from that. I didn't really do that calculation. We are lowering our utility guidance by $0.10. So I don't have that number. It is lower than 70. You can do the math if you want.

Got it. Just to wonder if there's any updates on the claims from the DNR on the Babb Road fire? Any updates from when we last spoke?

Yes, this is Dennis. We don't have any new updates on that. We are still engaging constructively with the Department of Natural Resources. There have been a few minor claims, but nothing significant. The DNR report has been released, and we maintain our stance that the fire was not caused by any deficiencies in our equipment or related concerns. It was simply an unprecedented storm that knocked down a tree outside the right-of-way, which ignited the fire. So, there's nothing new from what we've discussed previously.

Okay. And then are there any fires in your service territory now that we should be aware of?

Yes, you can see from the nightly news that there are fires throughout the Northwest, with a few in and around our service area. However, none of these are significant at this time, so we have no concerns. As I mentioned earlier, it is peak fire season, and there are some smoky areas due to the fires in the Northwest. We are actively monitoring and managing our system to minimize any potential impacts. In short, there is nothing significant to report at this moment.

To add to what Dennis was saying, those that have started have been affected by some lightning, which has caused issues, but there are no deficiencies in our equipment related to this.

Yes, that's correct.

And you do have another question from the line of Vedula Murti.

Can you remind us what the assumed earned ROE was for that range in the reaffirmation of 2023?

We are approaching our allowed return on equity minus 70 basis points, which means we have about 9.4% available in our jurisdictions. If we receive the necessary approvals from the Idaho Commission and there are no changes in Washington, and if we maintain our current return on equity, it would be 9.4% in both jurisdictions. However, with a 70 basis points lag, that translates to approximately 8.7% from the return on equity perspective.

And there are no further questions at this time. Mr. Wilcox?

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

This does conclude today's conference call. Thank you for your participation. You may now disconnect.