Avista Corp Q2 FY2025 Earnings Call

Good day, and thank you for standing by. Welcome to the Avista Corporation Q2 2025 Earnings Conference Call. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stacey Walters, Investor Relations Manager. Please go ahead.

Good morning. It's great to have you with us for Avista's Second Quarter 2025 Earnings Conference Call. Our earnings and second quarter 2025 Form 10-Q were released premarket this morning. You can find both on our website. Joining me today are Avista Corp. President and CEO, Heather Rosentrater; and Senior Vice President, CFO, Treasurer and Regulatory Affairs Officer, Kevin Christie. We will be making forward-looking statements during this call. These involve assumptions, risks and uncertainties, which are subject to change. Various factors could cause actual results to differ materially from the expectations we discuss in today's call. Please refer to our Form 10-K for 2024 and our Form 10-Q for the second quarter of 2025 for a full discussion of these risk factors. Both are available on our website. I'll begin with a recap of the financial results presented in today's press release. Our consolidated earnings for the first half of 2025 were $1.15 per diluted share compared to $1.20 for the first half of 2024. For the second quarter of 2025, our consolidated earnings were $0.17 per diluted share compared to $0.29 for the second quarter of 2024. Now I'll turn the call over to Heather.

Thanks, Stacey, and hello, everyone. The results we're sharing today reflect continued strategic progress at Avista Utilities, as well as headwinds from shifts in market sentiment related to clean technology. I'm happy to share that even with these headwinds, we are affirming our consolidated earnings guidance for 2025. At Avista Utilities, our year-to-date results of $1.25 per diluted share reflect a nearly 7% increase over 2024's year-to-date results, and highlight the continued strength of our strategic execution. We also continue to make progress in activities that set us up for success going forward. In the second quarter, our all-party, all-issue settlement in Oregon was approved by the commission, and we reached an all-party, all-issue settlement in Idaho. Both cases build on the constructive regulatory outcomes already in place through our Washington multiyear rate plan, and serve to raise our confidence in our expectations for Avista Utilities in 2025. However, market conditions in the clean energy sector weighed on our consolidated earnings performance in the second quarter. Valuations within our portfolio of investments, primarily those in clean technology-focused funds, were significantly impacted by shifts in public policy and sentiment. These valuations are disappointing, and Kevin will share more about our investments in a few minutes. I want to take time to highlight the strong fundamentals of our business. Our core utility operations continue to be strong, and our solid results at Avista Utilities reflects strong performance, underpinned by diligent cost management and constructive regulatory outcomes. I want to commend the efforts of each of our employees working hard each day to position us for this strategic success. We will continue to focus on doing what we do best, serving our customers and communities with compassion and optimism for the future, providing the reliable energy our customers count on us to provide. Ensuring that we can continue to provide that safe and reliable energy is the purpose behind our current all-source request for proposals, or RFP. We issued our RFP in May, seeking 100 to 425 megawatts of generation to meet the needs we've identified in our Integrated Resource Plan by 2029. We received more than 80 bids for consideration, including a wide array of resource options, including wind, solar, battery storage, natural gas, distributed energy, demand response and combinations of these resources, equally broadened scope where the contracted ownership options included in the bids. We submitted self-build resource bids for consideration and also received bids for build transfer agreements, power purchase agreements and other contract structures. Together with our independent evaluator, we are reviewing each bid. We expect to have a short list of preferred projects by the end of this month. We intend to request selected shortlist projects to resubmit detailed proposals that include any necessary repricing as well as clarity on their ability to take advantage of safe harboring allowed by the budget reconciliation bill. We anticipate contract negotiations with final selected projects will begin in the fourth quarter of 2025. I continue to be optimistic about the opportunities that are ahead of us. Information from this RFP process is also crucial to inform our conversations with potential large load customers. In addition to several requests from existing large industrial customers for expansion, we have over 3,000 megawatts of requests in our pipeline of potential demand, looking for system integration within the next 3 to 5 years. For context, our peak electric native load is just under 2,000 megawatts. We continue to advance conversations with these potential customers, and our all-source RFP responses provide us with up-to-date supply resource costs and availability information to help inform those conversations. However, meeting the demand from these potential customers will entail not only additional generation, but also regional grid expansion. While we don't have available capacity to serve all the current requests in the pipeline, system impact studies indicate that we have capacity available to accommodate a portion of those requests. The level of available capacity varies by location, and we are most optimistic about our ability to serve customers with scalable implementation capability. I believe in our ability to be competitive with these potential loads while also ensuring benefits for our existing customers and look forward to sharing our progress in future calls. Now I'll hand the call to Kevin for more discussion of our earnings.

Thanks, Heather, and good morning, everyone. Like Heather said, Avista Utilities' performance continues to be strong and reflects our ongoing success with constructive regulatory outcomes as well as continuous cost management. As expected, Avista Utilities' earnings in the second quarter of 2025 are slightly below the same period from 2024. This is primarily due to the changes in the shape of authorized levels of resource costs year-over-year as well as how our operating costs are incurred on a more consistent basis throughout the year, while revenue is typically highest in the first and fourth quarters. Consolidated earnings were materially impacted by valuation losses of $0.12 per diluted share in the second quarter. These are disappointing results, and I want to discuss them directly. The majority of these changes in valuation were connected to our investments in clean technology-focused venture funds. Shifts in public policy and sentiment with regard to the role of clean energy in America's energy future have had a material impact on the value of these funds. As clarity is restored to public policy, we anticipate that the volatility in valuation will moderate. The value recorded in our financials represent our portion of the fund's value on a 1-quarter lag basis due to the timing of when we receive financial information from these investments. Uncertainties surrounding the impact of tariffs as well as the extent to which the highly anticipated tax reconciliation bill would prioritize investment in natural gas or fossil fuel generation over clean energy both negatively impacted values in the first quarter. In general, Clean Technology Funds and Indices reached their lowest valuation point in years right around the close of the first quarter of this year. The variety of the businesses within the Clean Technology Funds suggest that these valuations may have reached a relative low point, but we can't say that for certain given the dynamics outside our control and the fact that public policy and tariffs are still evolving. When we set guidance for other businesses at 0 for the year, we pointed to our expectation of volatility from 1 quarter or 1 year to the next through the recognition of valuation adjustments. We don't predict the valuations of these companies. We continue to see strategic value in learning about innovations related to the utility of the future and the future of energy technology as well as investing in the economic development of our service territory. Over the long term, we do expect benefits from these investments through economic development, shared learning and gains. Building on the constructive outcomes from our 2024 Washington general rate cases, our all-party, all-issue settlement in our Oregon GRC was approved by the commission. New rates will take effect September 1. In Idaho, we reached an all-party, all-issue settlement for the general rate cases we filed in January. If approved by the commission, new rates from that proceeding will also go into effect September 1. Work has already begun to prepare for the next Washington GRC, which we expect to file in the first quarter of 2026. We are continuously investing in our utility infrastructure to support customer growth and maintain our system so that we can safely and reliably serve our customers. Capital expenditures at Avista Utilities were $236 million in the first half of 2025. We expect overall capital expenditures of $525 million in 2025. From 2025 through 2029, we expect capital expenditures of nearly $3 billion, resulting in an annual growth of between 5% and 6%. These estimates do not include any incremental capital requirements that could result from our RFP process or opportunities that might arise from transmission projects, whether the regional grid expansion that Heather mentioned or large projects like the North Plains Connector or new large load customers. Any incremental capital is most likely to occur in the latter half of our capital plan. Turning to liquidity. As of June 30, we had available liquidity of $106 million under our committed line of credit and $42 million under our letter of credit facility. In July, we issued $120 million of long-term debt and do not expect further debt issuances this year. We expect to issue up to $80 million of common stock in 2025 and that includes $35 million, which was issued during the first half of the year. Earlier this year, S&P removed the negative watch from our credit rating, evidence of the strength of our balance sheet and business plans. We are confirming our consolidated earnings guidance with a range of $2.52 to $2.72 per diluted share for 2025. As a result of the $0.15 of valuation losses associated with our investment portfolio that we've recognized in the first half of the year, we expect to be at the low end of our consolidated range. We expect Avista Utilities to contribute toward the upper end of the range of $2.43 to $2.61 per diluted share. Our guidance for Avista Utilities includes an expected negative impact from the Energy Recovery Mechanism, or ERM, of $0.12 in the 90% customer, 10% company sharing band. We have already incurred $0.08 under the ERM in the first half of the year. Due to the staggered timing of rate cases throughout our multiple jurisdictions, going forward, our expected return on equity at Avista Utilities is 8.8%. AEL&P continues to perform well, and we expect it to contribute $0.09 to $0.11 per diluted share in 2025. Over the long term, we expect our earnings will grow 4% to 6% from a forecast 2025 base year. Before we shift to your questions, let me close with this. Avista Utilities is in a strong position. In each of our jurisdictions, we're well positioned with quality rate case outcomes, which provide necessary recovery of our cost and set costs at an appropriate level. We've been diligent in our cost management, ensuring that the expected increase in O&M year-over-year is achievable. And finally, we benefited from increases in non-decoupled revenue year-over-year, evident in our electric utility margin year-to-date. It's on the strength of the utility results that we are affirming our original guidance. Now we'd be happy to take your questions.

Our first question will come from Julien Dumoulin-Smith of Jefferies.

This is Brian Russo on for Julien. Just the 3,000 megawatts of large load that you're in discussions with, is there any way to kind of characterize that? Is it all data centers? Or could it be high-tech manufacturing or other types of reshoring? And then how does that kind of tie into maybe the high end of that 100 to 400 megawatts in the RFP?

Yes, thank you, Brian, for the question. The 3,000 megawatts in the pipeline encompass a diverse range of loads, and there isn’t one particular type that stands out. Having the responses from the RFP is beneficial as it allows us to have more informed discussions with potential customers. The cost of supply is a significant factor in their decision-making. Over the next month or two, we will have much clearer insights regarding the types of generation, their costs, and timelines, which will aid in those discussions. We are eager to move forward with this additional information.

Right. Okay. So I guess, are you comfortable with the high end of the RFP of 400 megawatts? Or could you conceptually need even more on any kind of normal type win rate on this large customer load?

Fortunately, with the 80 bids we received and the diverse types of generation represented, we have ample opportunities to support those discussions.

Okay. Great. And then just on the other businesses, I'm just curious, and I appreciate the commentary before despite noncash volatility it creates in earnings. I'm just wondering, longer term, I think you've already lowered kind of the annual business investment allocation I think to $5 million or somewhat more a year ago or 2. And I'm just wondering, would you possibly look for exit or monetization opportunities when they present themselves in the near and intermediate term?

Yes, thank you for the question. It's Kevin. We are analyzing our next steps as we move forward. We recognize the strategic benefits and want to maintain those while looking ahead. We plan to adjust our budgets slightly as we assess the situation, particularly regarding clean energy and clean technology. I want to highlight that within our funds, there is a general category of clean technology that we often use for comparisons, but the investments in our portfolio are diverse and many are not directly tied to clean technology. It will be interesting to see how things develop. As I mentioned in a previous call, we need the IPO market to reopen so we can explore exit opportunities for our investments. We believe there are several promising opportunities that could bring about positive changes. However, we will not just wait and see how things go; we are reviewing strategies and considering adjustments to our nonregulated businesses.

All right. Great. And then just lastly, it's nice that you're at the higher end of the Avista Utilities' guidance range now. But it seems like you're still maintaining that 8.8% earned ROE. Is there potential upside to further close that regulatory gap considering the success or achievements you've had to date to get to the high end of this year's range?

I think that we want to make sure that we place a number out there for you all that's achievable, and we think that the 8.8% is achievable. If we are successful, and I'd like to think that we will be, as you think about what Heather shared that we have opportunities for additional investments that could benefit us and some growth that could benefit us. That would really drive additional EPS growth. I think the ROE at the utilities, 8.8% is a number that's achievable, and we'll stick there for now.

Our next question will be from Sophie Karp of KBCM.

Maybe you can talk a little bit about the RFPs here. I don't know if I missed it in the prepared remarks. Are there any thermal resources in there?

Are there any thermal resources in the RFP? We did have natural gas as one of the resources that we received with solar and wind and battery storage and others.

And how do you guys feel about like, I guess, your prospective win rate in this round? I don't know if it's too early to talk about that, but like with thermal resource being in there, maybe it's a little easier for you to win that versus a renewable resource because of like accounting legalization issues. But can you discuss that a little bit?

I don't know if I caught all of that regarding our work with a third-party evaluator to review all 80 bids and evaluate their costs, timelines, feasibility, and how they align with our compliance requirements in Washington State. We are considering all of these factors. I'm not sure if that covers everything.

I was just wondering if you could share whether you bid into the thermal resource with a pure bid or a third party? And is it easier for Avista Utilities to win a thermal resource versus a renewable plant?

So at this time, with the evaluation underway, we're not sharing specifically what the self-bid options that we put in, but we do think that our bids will be competitive. That's why we put them in, but that's all I can share.

Got it. Got it. Okay. And then I was just wondering if you could talk a little bit about the outlook for wildfires in your region, like how is it shaping up so far? What are you guys seeing on the ground because it's been a pretty dry summer in the West?

Yes. The fire activity has been, I think, above normal. But for us, it's been good so far. We haven't seen significant starts, yes, so in August, we'll see. But it is drier than normal, the summer. So we're using all of our mitigation tactics to minimize that risk going forward.

And I'm showing no further questions. I would now like to turn the conference back to Stacey for closing remarks.

Thank you all for joining us today and for your interest in Avista. Have a great day.

And this concludes today's conference call. Thank you for participating. You may now disconnect.