Avista Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Avista is primarily a regulated electric and natural gas utility serving the Pacific Northwest, with a Juneau, Alaska utility subsidiary. Interim financial statements are unaudited; the independent accountant performed a review, not an audit.
Financial performance and position
- Third quarter: Operating revenue was $313.6 million, up 4.0% year over year. Net income attributable to Avista shareholders was $13.0 million, versus $10.5 million; diluted EPS was $0.21 versus $0.16. Continuing-operations net income was $12.7 million versus $10.5 million.
- First nine months: Revenue was $1.097 billion, up 3.5%. Net income attributable to shareholders was $84.7 million versus $159.8 million, and diluted EPS was $1.35 versus $2.59. Continuing-operations net income was $84.2 million versus $89.2 million; the prior-year comparison included a substantial Ecova sale gain.
- Utility gross margin: Avista Utilities’ electric and natural gas gross margin was $163.1 million in Q3, up from $154.0 million; for nine months it was $563.3 million, up from $545.7 million. These are management-presented non-GAAP measures.
- Cash flow and investment: Nine-month operating cash flow was $311.2 million, compared with $265.7 million. Utility capital expenditures were $272.8 million, versus $229.8 million. Cash ended at $9.3 million, down from $22.1 million at year-end 2014. Cash flow after utility capital spending was approximately $38.4 million, before dividends and other investing or financing uses.
- Debt and liquidity: Total debt was $1.666 billion, or 52.5% of debt plus shareholder equity, versus $1.656 billion and 52.8% at December 31, 2014. The $400 million revolving facility had $130.0 million drawn and $43.8 million of letters of credit, leaving $226.2 million available. The company reported compliance with its 65% debt-to-capitalization covenant. Current assets were $258.0 million and current liabilities $447.7 million.
- Dividends: Dividends declared were $0.33 per share for Q3 and $0.99 for the first nine months, compared with $0.3175 and $0.9525, respectively, in 2014.
Changes versus comparable periods
- Q3 earnings rose principally on higher utility gross margin, including Washington rate increases and higher electric and gas loads, and lower income tax expense from a 2014 tax-return reconciliation. Expected increases in operating costs, depreciation and taxes partly offset the improvement.
- Nine-month continuing earnings declined as unusually warm first-quarter weather reduced heating demand and costs rose. Washington rate increases, decoupling, lower net power supply costs and lower earnings-sharing provisions partly offset the effect.
- 2014 nine-month results included approximately $68 million of net Ecova disposal gain in discontinued operations; Ecova was sold in June 2014. In 2015, discontinued-operations income included $0.5 million of Ecova-related true-ups. Comparability is also affected by AEL&P being included for all of 2015 but only Q3 2014.
- Utility capital spending increased, and depreciation and amortization rose with plant additions and the full-period inclusion of AEL&P. Pension and postretirement benefit expense also increased.
Outlook, risks and unusual items
- Management estimated 2015 capital expenditures of $375 million for Avista Utilities and $14 million for AEL&P; estimates for 2016 were $375 million and $17 million, and for 2017, $400 million and $13 million. For 2016, it expected approximately $155 million of long-term debt and $55 million of common stock issuance to help fund investment and maintain capital structure.
- Management said operating cash flows and committed credit lines should provide adequate resources for the next 12 months. In October 2015, Avista agreed to issue $100 million of 4.37% first-mortgage bonds due 2045; the bond sale was scheduled for December 2015. It paid $9.3 million to settle related interest-rate swaps.
- Washington rate cases remained pending. After partial settlement and updated filings, Avista’s requested annual increases were $3.6 million for electric and $10.3 million for natural gas; a final decision was not yet reported. Idaho parties reached an October settlement for increases effective January 2016, subject to regulator approval: $1.7 million electric and $2.5 million gas. Oregon’s 2015 gas rate case was pending.
- Project Compass cost recovery was disputed: regulator staff recommended disallowances of $12.7 million in Washington and $1.2 million in Oregon, primarily citing project delays. Management considered a disallowance less than probable and planned to defend recovery.
- New federal coal-ash rules prompted an $11.7 million increase in the Colstrip asset retirement obligation. Future compliance and retirement costs remain uncertain and could be material; Avista expects to seek recovery through customer rates.
- Other notable exposures include Clean Air Act litigation concerning Colstrip, with a liability trial scheduled for May 2016, and proposed greenhouse-gas rules and state initiatives that could raise costs or constrain generation. Management could not estimate the potential effects of the greenhouse-gas measures. The Pacific Northwest refund proceeding remained subject to Seattle’s rehearing request; the company did not expect a material adverse effect.
- Derivative and market risks include potential collateral calls if energy prices move sharply or credit ratings fall below investment grade. Management estimated additional collateral needs of up to $9.8 million for energy contracts and $7.4 million for interest-rate swaps under a below-investment-grade downgrade scenario. The company reported investment-grade ratings from S&P and Moody’s.
Important facts for investors to verify
- Track final Washington, Idaho and Oregon rate-case decisions, including Project Compass cost recovery and the timing and amount of approved rates.
- Assess recurring utility earnings separately from the 2014 Ecova disposal gain, and account for the AEL&P acquisition when comparing periods.
- Monitor capital spending, planned debt and equity issuance, cash levels, available credit, and compliance with debt and dividend restrictions.
- Review updated Colstrip coal-ash obligations, environmental compliance costs, and the outcome of the Colstrip litigation.
- Check whether weather, hydroelectric generation, commodity prices, regulatory deferrals and collateral requirements materially affect future cash flows and earnings.