Avista Corporation — Q2 2017 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 other businesses. This unaudited report covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods.
Financial performance and liquidity
- Q2 revenue: $314.5 million, down 1.4% from $318.8 million. Net income attributable to Avista shareholders was $21.8 million, down 20.1% from $27.3 million; diluted EPS was $0.34 versus $0.43.
- First-half revenue: $751.0 million, up 1.9% from $737.0 million. Shareholder net income was $83.9 million, down 1.2% from $84.9 million; diluted EPS was $1.30 versus $1.34.
- Operating results: Operating income was $56.1 million in Q2 (versus $61.6 million) and $171.5 million for the first half (versus $167.7 million). First-half utility gross margin, a non-GAAP measure, rose to $450.1 million from $437.1 million. Q2 gross margin was $197.3 million versus $196.0 million.
- Cash flow: First-half operating cash flow was $228.5 million, up from $156.0 million; utility capital expenditures were $177.7 million, compared with $182.8 million. Cash dividends paid were $46.2 million. Cash and cash equivalents at June 30 were $13.4 million.
- Debt and liquidity: Total debt, including current debt, short-term borrowings and affiliated-trust debt, was $1.87 billion, or 52.6% of debt plus shareholder equity, versus $1.85 billion at year-end. Current maturities of long-term debt and leases were $277.8 million. Avista reported $207.3 million available under its $400 million credit line, plus an unused $25 million AEL&P line, and stated liquidity was adequate for the next 12 months. It was in compliance with credit-facility covenants.
- Dividends: Declared dividends were $0.3575 per share for Q2 and $0.7150 for the first half, up from $0.3425 and $0.6850, respectively, in 2016.
Material changes and management commentary
- Q2 earnings declined mainly because Avista Utilities had higher maintenance, depreciation and interest costs, and incurred merger-related expenses; the company also cited higher losses at other businesses. Lower electric resource costs and improved margins at Alaska Electric Light and Power partly offset these pressures.
- For the first half, higher retail usage, customer growth and Idaho and Oregon rate increases lifted utility revenue and gross margin. Cooler weather supported retail usage, while weather-related decoupling rebates and lower wholesale sales weighed on revenue. Increased hydroelectric generation helped reduce electric resource costs.
- Operating cash flow improved substantially, chiefly because cash collateral posted for derivatives was much lower than in the prior-year period ($5.5 million versus $83.5 million). This is a timing and collateral effect, not solely an earnings improvement.
Outlook, regulatory matters and risks
- Proposed merger: On July 19, 2017, Avista agreed to be acquired by Hydro One for $53.00 in cash per share, subject to shareholder and regulatory approvals and other closing conditions. Closing was expected in the second half of 2018. Certain termination circumstances carry a $103 million fee; failure to complete the deal could affect the share price, financing access and results.
- Rate cases: Avista’s 2016 Washington rate-increase requests were denied. Its 2017 Washington filings sought a three-year rate plan, including a requested $15 million electric power-cost adjustment and proposed electric and gas revenue increases; these requests were pending. Idaho rate requests were also pending. An Oregon settlement proposed a $3.5 million annual base-revenue increase, subject to approval; it included a $0.8 million plant write-off recorded in Q2.
- Funding plans: Management expected to issue up to $90 million of long-term debt and up to $70 million of common stock in the second half of 2017 to support capital expenditures and capital structure. It expected 2017 pension contributions of $22 million, including $14.8 million contributed in the first half.
- Contingencies: Avista Energy disputed a claim that it could owe as much as $16 million in connection with California market proceedings; the company said it could not predict the outcome. Costs and timing for Cabinet Gorge dissolved-gas abatement and fish-passage work were not estimable. A Washington regulatory appeal could result in customer refunds of up to $9.5 million, net of an amount already accrued.
- Other risks: Derivative collateral needs could rise with market movements or credit downgrades. Management identified uncertainty around pending regulation of greenhouse-gas emissions. It reported no significant amounts accrued for unresolved contingencies and said other risk factors had not materially changed from the 2016 Form 10-K.
Most important facts for investors to verify
- Progress and conditions for the Hydro One transaction, including required approvals, expected timing and termination-fee exposure.
- Outcomes of Washington, Idaho and Oregon rate proceedings, and any consequences of the Washington judicial review or potential customer refunds.
- Whether operating cash flow remains strong after the unusually large prior-year derivative-collateral movement, alongside planned capital spending and financing needs.
- Debt maturities, credit-line availability and possible additional collateral requirements if market conditions or credit ratings deteriorate.
- The trajectory of utility maintenance, depreciation, interest and merger costs, and the extent to which regulators permit recovery of utility investments and expenses.
The interim financial statements received an independent accountant’s review, not an audit; the accountant reported no material modifications needed for GAAP conformity.