Avista - Q1 2024

Executive Summary

• Q1 2024 EPS was $0.91, up 24.7% year over year (Q1 2023: $0.73) and seasonally lower than Q4 2023 ($1.08) as operations normalized post-winter; Avista confirmed full-year 2024 EPS guidance of $2.36–$2.56.
• Utility operating revenues rose to $594.9M, up 29.3% YoY, with utility margin improving despite an ERM pretax expense of $6.0M (vs $7.6M in Q1 2023) and elevated purchased power costs during January’s extreme cold.
• Management revised ERM expectations to a full-year negative $0.07 per share in the 90% customer/10% company band; they highlighted a prospective large customer agreement expected by end of Q2 to partially offset ERM headwinds.
• Capital execution remains robust: $117.2M utility capex in Q1; 2024 plans of $500M (Utilities) and $21M (AEL&P); remarketed $83.7M tax‑exempt bonds at 3.875% and do not expect further long-term debt issuance in 2024; ~$70M equity issuance planned.
• Wall Street consensus estimates via S&P Global for Q1 2024 EPS and revenue were unavailable at the time of retrieval; therefore, formal beat/miss assessment vs consensus cannot be provided (S&P Global data unavailable).

What Went Well and What Went Wrong

What Went Well

• Earnings “right in line with expectations,” with consolidated EPS of $0.91 and Avista Utilities net income of $67.5M on stronger utility margin from general rate cases; AEL&P results met expectations.
• Operational progress: Post Falls dam modernization launched (five-year, ~$225M project) with a $5M DOE efficiency grant; supports long-term reliability and efficiency.
• Liquidity and financing: $198.3M available under the committed line and $36.0M under letter of credit; remarketed $83.7M tax‑exempt bonds at 3.875% (~140 bps below taxable market), reducing expected 2024 debt needs.

What Went Wrong

• ERM headwinds: Q1 ERM pretax expense was $6.0M, driven by below-normal hydro and high purchased power costs during mid‑January’s cold snap; 2024 ERM now expected to be a negative $0.07/share.
• Hydrology deteriorated further vs initial expectations, reducing optimization benefits and increasing volatility under existing ERM mechanics until potential Washington rate case changes.
• Sequential EPS decline vs Q4 2023 ($1.08 → $0.91) reflects seasonal normalization and ERM impacts; management aims to offset via prospective large customer margin contribution.

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Avista Corporation Q1 2024 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's call is being recorded. I would now like to hand the conference over to our first speaker for today, Stacey Wenz, Investor Relations Manager. Stacey, you may begin.

Stacey Wenz (Investor Relations Manager)

Thank you. Good morning, everyone. Welcome to Avista's first quarter 2024 earnings conference call. Our earnings and first quarter Form 10-Q were released pre-market this morning. You can find both on our website. Joining me this morning are Avista Corp CEO Dennis Vermillion, President and COO Heather Rosentrater, Senior Vice President, CFO, Treasurer, and Regulatory Affairs Officer Kevin Christie, and Vice President, Controller, and Principal Accounting Officer Ryan Krasselt. Today, we will make certain statements that are forward-looking. These involve assumptions, risks, and uncertainties which are subject to change. Various factors could cause actual results to differ materially from the expectations we discussed in today's call. Please refer to our Form 10-K for 2023 and our Form 10-Q for the first quarter of 2024, which are available on our website for a full discussion of these factors. First, I will recap the financial results presented in today's press release.

Our consolidated earnings for the first quarter of 2024 were $0.91 per diluted share, compared to $0.73 for the first quarter of 2023. Now I'll turn the call over to Dennis.

Dennis Vermillion (CEO)

Well, thanks, Stacey, and good morning, everyone. In March, Avista marked its 135th anniversary. In the midst of unprecedented change in our industry, I look back on our history and realize that our legacy of innovation is still alive and well. We've made our ways through seismic shifts before, and we're prepared to meet today's challenges, and those are the future. I continue to be inspired by the innovation that makes it possible not only to persevere but to prevail over the years. Who we are today is a testament to the thoughtful planning and careful building of our predecessors who formed the company that we've inherited. The quality of our work is recognized on the outside as well. For the fifth year in a row, Avista has been recognized by Ethisphere as one of the world's most ethical companies.

Avista is one of only 8 honorees in the energy and utilities industry this year. We're putting our innovative spirit in action with the modernization of our Post Falls Dam. We started work on this project here in the first quarter, and we currently estimate we will spend $225,000,000 over 5 years replacing existing aging equipment with more modern and energy-efficient designs. The project was also selected by the U.S. Department of Energy to receive a $5,000,000 grant associated with the improvements in efficiency that are planned with part of the scope of that work. We are delighted with the Department of Energy's support. It enables our $500,000,000 capital budget to accomplish even more for our customers in 2024.

Turning to earnings, our earnings for the first quarter are right in line with our expectations, and I believe we are well positioned to meet our full-year earnings targets. Kevin will have more of this later. As we expected, the general rate case in Washington had a negative impact on our first quarter results. Our general rate case in Washington seeks to modify the way the power supply costs are shared with our Washington customers, and if approved, these changes would reduce the volatility we experience under the Energy Recovery Mechanism. We will continue to work through the rate case process with the commission as we always do as we execute on our regulatory strategy. Executing on our regulatory strategy includes seeking to adjust customer rates to reflect the actual cost of providing service.

In addition, the general rate case currently before the Washington Commission, we expect to file our next Oregon case in the latter half of 2024. We expect to file general rate cases in Idaho in the first quarter of 2025. Now I'll turn the call over to Heather for some updates about our operations.

Heather Rosentrater (President and COO)

Thank you, Dennis. I'm glad to be here with you this morning. Our first quarter operations were impacted by the extreme cold which took hold throughout the Pacific Northwest in mid-January, highlighting the growing need for additional capacity in the region. Demand over the period of extreme cold exceeded our expectations based on a similar cold snap in late 2022. We're taking the increase in demand into account as we continue our integrated resource planning. Throughout the region, conversations around resource adequacy are continuing as we contemplate the transition to clean energy and the impact of increasing electrification. Ensuring that we have adequate resources to serve our customers reliably into the future may accelerate our generation needs compared to what was identified in our 2023 integrated resource plan.

We're still working through how the landscape of our generation needs may change utilizing our biennial integrated resource planning process, and we will also continue to intentionally consider opportunities as they arise. I also want to spend some time talking about our wildfire preparedness efforts. Our wildfire risk mitigation efforts are critical to our customers, our communities, and our shareholders, and we made great progress in 2023 executing our wildfire mitigation plan, work that will continue as we move through 2024 and beyond. We plan to spend upwards of $55,000,000, including capital and O&M, in 2024 on wildfire mitigation work. So let me share a few highlights of our progress. In 2023, our vegetation management teams set company-wide records for the number of risk trees they addressed on the distribution system. As of the end of last year, our transmission system was 40% steel.

The progress in both programs is ahead of our planned targets for the work. Our grid hardening work, which includes fiberglass cross-arms, fire-resistant pole wraps, and undergrounding, among other tools, exceeded their targets in 2023 as well. We are taking this momentum from our 2023 efforts into 2024. As we look ahead to the upcoming fire season in our service territory, we are prepared with our fire safety mode. Fire safety mode consists of additional safety measures that are in place whenever the National Weather Service and our own fire risk dashboard indicate elevated fire risk within our service territory. In 2023, we implemented a fire safety mode four times, and we saw positive results from these elevated protection settings. In 2024, public safety power shutoffs are part of our toolkit as well.

We have been working with key stakeholders over the past two years to prepare, and we are holding a press conference to communicate the details of our public safety power shutoff plan more broadly next week. This year, we will continue partnering with EEI to focus on opportunities at the federal level to provide support for wildfire risk. At the same time, we are leading efforts in the region to develop legislative protections for utilities at our state level. Now I'll turn the call over to Kevin for a discussion of financial results.

Kevin Christie (SVP, CFO, Treasurer, and Regulatory Affairs Officer)

Thanks, Heather, and good morning, everyone. We are off to a solid start in 2024. Earnings at Avista Utilities increased in the first quarter of 2024 compared to the first quarter of 2023. Our utility margin increased as a result of our general rate cases, positively impacting our earnings. As Dennis mentioned, we experienced some headwinds in the first quarter, and they resulted in a $6,000,000 pre-tax expense in the first quarter of 2024. This compares to a pre-tax expense of $7,600,000 in the first quarter of 2023. AEL&P's results in the first quarter were also right in line with our expectations. We are committed to investing the necessary capital in our utility infrastructure. Our capital expenditures at Avista Utilities were $117,000,000 in the first quarter of 2024.

So that we can continue to support customer growth and maintain our system to provide safe, reliable energy to our customers, our planned capital expenditures are $500,000,000 in 2024. We expect capital expenditures at AEL&P to be $21,000,000, and investments at our other businesses to be $11,000,000 in 2024. On the liquidity front, as of March 31st, we had $198,000,000 of available liquidity under our committed line of credit and $36,000,000 available under our letter of credit facility. In April, we took advantage of a remarketing opportunity for $83,700,000 of tax-exempt bonds. We were pleased to be able to remarket them at 3.875%, about 140 basis points lower than the taxable market. We don't expect further debt issuances during the year.

We expect to issue approximately 70,000,000 of common stock in 2024, which will occur throughout the remainder of the year to fund our capital spending. Improved cash from operations will also help fund our planned expenditures in 2024. We are confirming our earnings guidance for 2024 with a consolidated range of $2.36-$2.56 per diluted share. We expect Avista Utilities to contribute within a range of $2.23-$2.39 per diluted share. Several changes have occurred since we shared our initial guidance for the 2024 with you in February. There were unfavorable changes in forward prices that resulted in expected reduced benefit from optimization when compared to our forecasts at the beginning of the year. In addition, hydro conditions, which we anticipated would be below normal, have further deteriorated.

As a result, we expect the impact of the ERM on the full year for 2024 to be -$0.07 per diluted share in the 90% customer, 10% company sharing bands. I'm pleased to share that by the end of the second quarter, we expect to finalize an agreement with a prospective large electric customer already in our service territory that is currently being served in the wholesale markets. We expect the resulting increase in utility margin to help offset the forecast impact of the ERM on our results in 2024. Our guidance for Avista Utilities in 2024 reflects unrecovered structural costs, which we estimate will reduce the return on equity by 70 basis points. We expect 60 basis points of regulatory timing lag in 2024. This results in an expected return on equity at Avista Utilities of 8.1% in 2024.

We also expect AEL&P to contribute in the range of $0.09-$0.11 per diluted share, and we expect our other businesses to contribute in the range of $0.04-$0.06 per diluted share in 2024. Assuming a constructive outcome in our 2024 General Rate Case filings, we expect our earnings to grow over the long term in the range of 4%-6% from a 2025 base year. Now we'll be happy to take your questions.

Operator (participant)

Thank you. As a reminder, to ask a question, you'll need to press star 11 on your phone. Then you will hear an automated message advising that your hand is raised. Again, to ask a question, please press star 11 on your telephone. Please stand by while we compile the Q&A roster. At this time, we are not showing any questions. Stacey, would you like to return to the call?

Stacey Wenz (Investor Relations Manager)

Absolutely. Thank you all for joining us today, and for your interest in Avista. We look forward to seeing many of you in a few weeks at AGA. Have a great day.