Avista Corporation — Q1 2020 Form 10-Q
Business context and reporting period
Avista is primarily a regulated electric and natural gas utility operating in the Pacific Northwest and Alaska, with smaller non-utility businesses. This unaudited filing covers the three months ended March 31, 2020, compared with Q1 2019. The interim financial statements received a review by Deloitte; the review is not an audit.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Operating revenue | $390.2 million | $396.5 million |
| Income from operations | $82.2 million | $67.1 million |
| Net income attributable to Avista shareholders | $48.4 million | $115.8 million |
| Diluted EPS | $0.72 | $1.76 |
| Net cash from operating activities | $135.3 million | $196.9 million |
| Utility capital expenditures | $95.5 million | $93.6 million |
| Cash and cash equivalents at quarter-end | $18.9 million | $9.9 million at Dec. 31, 2019 |
Avista Utilities’ non-GAAP utility margin was $247.6 million, compared with $239.0 million: electric margin was $170.7 million versus $162.6 million, and natural gas margin was $77.0 million versus $76.4 million. Management says the electric improvement primarily reflected lower net power-supply costs and customer growth. These margin measures are not GAAP revenue or profit measures.
Total debt, including current debt and leases, was $2.253 billion; debt was 53.5% of total capital at March 31. Short-term borrowings were $185 million. The company reported $182 million available on its $400 million revolving facility and $25 million available to AEL&P under its separate facility. In April, Avista borrowed an additional $100 million under a one-year credit agreement. The quarterly dividend declared was $0.405 per share.
Material changes versus the prior period
- Net income and EPS were substantially lower than Q1 2019, mainly because 2019 included a $103 million Hydro One merger termination fee, partly offset by $19.7 million of merger transaction costs. The fee was a significant, non-recurring prior-period item.
- Q1 2020 operating income increased despite slightly lower total revenue. Avista reported lower utility resource costs, but higher operating expenses and depreciation, including bad-debt expense and regulatory-related accruals.
- Operating cash flow declined year over year, principally reflecting the prior-year merger termination fee. Q1 2020 cash flow also benefited from lower natural-gas prices and related cost deferrals compared with 2019.
- Non-utility revenue fell to $0.8 million from $7.9 million, primarily because METALfx was sold in April 2019. Other businesses recorded a $1.0 million net loss in Q1 2020, including impairment and bad-debt accruals, partly offset by investment gains.
Outlook, management commentary, risks and contingencies
- COVID-19: Management reported no material overall load or retail-revenue reduction in Q1, as local restrictions began in mid-March. April electric load was about 5% lower overall, with commercial and industrial loads down about 12% and 14%, respectively, partly offset by residential load about 10% higher. Natural-gas loads were within normal seasonal bounds. Management expected prolonged unemployment to depress load and customer growth into 2021 and forecast lower 2020 operating cash flow.
- Management said regulatory mechanisms cover over 90% of utility revenue and mitigate some effects of lower usage, but recovery and recognition may be delayed or subject to limits. The company suspended customer disconnections and late fees, increased Q1 bad-debt expense by $1.6 million, and expected an additional $3.4 million of bad-debt expense for the rest of 2020 versus its original forecast. It sought regulatory authorization to defer certain pandemic-related costs and identified savings.
- Management expected available operating cash flow, credit facilities and planned financing to fund capital expenditures, dividends and other commitments for the next 12 months. It expected to issue approximately $165 million of long-term debt and up to $70 million of equity during 2020. Capital expenditure estimates for 2020–2022 were not materially changed; the filing does not provide the total projected capital expenditure amounts in the supplied text.
- Avista expected to file electric and natural-gas general rate cases with the WUTC and IPUC in Q4 2020. Its pending Oregon natural-gas rate request sought a 9.8% base-rate increase, or $6.8 million in annual revenue.
- Regulatory refunds and Colstrip: A Washington order requires $8.5 million of refunds related to the 2015 rate cases, returned over one year beginning April 1, 2020; $3.6 million had been accrued in 2019. A separate Washington order requires roughly $40 million of ERM refunds over two years and disallowed about $3 million of replacement-power costs associated with a 2018 Colstrip outage. The order also accelerates depreciation of Colstrip Units 3 and 4 through December 31, 2025 and establishes a $3 million community-transition fund, split between customers and shareholders; Avista recorded the liability and shareholder expense in Q1.
- Legal and environmental matters: The state of Washington is seeking recovery of costs from the 2018 Boyds Fire and alleges Avista negligence. The company disputes the allegations; damages had not been specified and the potential impact could not be estimated. For Colstrip ash remediation and closure obligations, Avista had posted surety bonds totaling approximately $23 million. Oregon’s March 2020 greenhouse-gas executive order may lead to future regulation, but its effects were not yet predictable.
- Liquidity and market risks: Management warned that a longer or more severe pandemic could weaken collections and cash flows, raise costs, delay projects, impair non-utility investments, and restrict or increase the cost of capital-market funding. Market declines and lower discount rates could increase pension liabilities and future funding needs. Derivative collateral requirements may rise with market volatility or a credit downgrade; the filing reports substantial potential additional collateral exposure for interest-rate swaps.
Important facts for investors to verify
- Separate recurring utility performance from the $103 million Hydro One termination fee in the prior-year comparison, and review Q1 2020 regulatory accruals and Colstrip-related costs.
- Track COVID-19 effects on customer demand, collections, bad debt, operating cash flow, and the approval and recovery of deferred costs.
- Monitor the timing and terms of planned debt and equity issuance, revolving-facility extension, and compliance with debt covenants.
- Follow the Washington customer refunds, ERM rebates, pending rate cases, and any further Colstrip replacement-power disallowances or closure obligations.
- Assess the Boyds Fire litigation, pension funding exposure, and possible collateral calls under derivative agreements.