Business context and reporting period
Avista Corporation’s Form 10-K covers the fiscal year ended December 31, 2017. Avista is primarily a regulated electric and natural gas utility serving the Pacific Northwest, with Alaska Electric Light and Power Company (AEL&P) as its other reportable utility segment. The filing was signed February 20, 2018. Financial statements received an unqualified audit opinion; the auditor also reported effective internal control over financial reporting.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Total operating revenue | $1,445.9 million | $1,442.5 million |
| Income from operations | $284.5 million | $289.8 million |
| Net income attributable to Avista shareholders | $115.9 million | $137.2 million |
| Diluted earnings per share | $1.79 | $2.15 |
| Operating cash flow | $410.3 million | $358.3 million |
| Utility capital expenditures | $412.3 million | $406.6 million |
| Shareholders’ equity at year-end | $1,729.8 million | $1,648.7 million |
2017 operating margin was approximately 19.7% and net margin approximately 8.0%, based on reported operating revenue. Avista Utilities’ non-GAAP electric and natural gas gross margin totaled $859.2 million, up from $833.3 million. Operating cash flow was slightly below utility capital expenditures, before dividends and other investing or financing needs.
At December 31, 2017, total debt was $1,926.2 million, or 52.7% of total debt and equity capitalization; shareholders’ equity was 47.3%. Cash and cash equivalents were $16.2 million, and current assets were $337.5 million versus current liabilities of $697.5 million. Avista had $260.6 million available under its $400 million committed credit facility; AEL&P had a separate $25 million facility with no borrowings outstanding. The 2017 dividend declared was $1.43 per share.
Material changes versus the prior comparable period
- Shareholder net income fell 15.5% and diluted EPS declined from $2.15 to $1.79. Management cited $14.6 million of costs for the proposed Hydro One acquisition, higher depreciation and interest expense, and the federal tax-law change. Acquisition costs were not passed through to customers, and a significant portion was not tax-deductible.
- Total revenue was nearly flat. Avista Utilities revenue declined modestly, while AEL&P revenue rose to $53.0 million from $46.3 million. Avista Utilities’ retail electric and gas sales benefited from customer growth and weather-driven load increases, but wholesale and fuel-sales revenue fell and decoupling produced rebates rather than the prior year’s surcharges.
- Avista Utilities’ resource costs declined, primarily from lower purchased-power costs and increased hydroelectric generation. Its total gross margin increased by $25.9 million.
- Operating cash flow increased $52.0 million, aided by tax refunds and lower interest-rate-swap settlement payments; pension contributions and collateral posted for derivatives increased.
- Year-end current debt rose sharply because $277.4 million of long-term debt and capital leases was classified as current, including substantial 2018 maturities. Total debt and capitalization mix remained similar to 2016.
Outlook, management commentary, risks and unusual items
- Hydro One transaction: The agreement provides for $53 cash per Avista share, subject to approvals and other closing conditions, with closing expected in the second half of 2018. Shareholders and FERC had approved it, but other approvals remained pending. The Oregon commission staff recommended denial of the application as originally filed and raised customer-benefit and ring-fencing concerns. Certain termination circumstances could require Avista to pay a $103 million fee. The filing also describes a remaining shareholder lawsuit.
- Tax-law change: The Tax Cuts and Jobs Act reduced the federal corporate tax rate from 35% to 21%. Avista recorded a $10.2 million discrete tax expense and a $442.3 million regulatory liability for amounts expected to be returned to customers. Management estimated customer benefits of approximately $50–$60 million annually, subject to regulatory treatment, and expected lower operating cash flow, partly due to loss of bonus depreciation for regulated utility property. Moody’s placed its credit rating on negative outlook.
- Funding plans: For 2018, management expected to issue approximately $375 million of long-term debt and up to $85 million of equity to refinance maturities, fund capital spending and tax-law impacts, and maintain an appropriate capital structure. Planned 2018 utility capital expenditures were approximately $412 million, including $405 million for Avista Utilities and $7 million for AEL&P.
- Rates and regulation: Washington denied Avista’s 2016 rate requests totaling $43 million. A 2017 Washington electric and gas rate plan remained pending, with a commission decision scheduled for April 2018; staff recommended lower revenue requirements and questioned recovery of certain interest-rate-swap settlement costs. Idaho approved a two-year rate plan effective in 2018 and 2019.
- Resource and environmental exposure: Results depend on weather, hydro conditions, energy prices, and regulatory cost recovery. Avista’s 15% interest in Colstrip faces potential environmental compliance costs and uncertainty over future operation or retirement; its remaining investment was $124.4 million. The 2017 resource plan forecast later need for additional resources, with conservation expected to meet 53% of future load growth requirements.
- Other risks: The company highlighted cyber and operational threats, potential collateral calls on commodity and interest-rate derivatives, pension funding and market risks, and possible disallowance or delay of regulatory recoveries. Its 2017 Washington rate case also put recovery of prior swap costs at issue.
Important facts for investors to verify
- Progress and final outcomes of all Hydro One approvals, customer-benefit conditions, the remaining lawsuit, and any termination-fee exposure.
- Whether the pending Washington rate cases allow recovery of requested costs, power-supply adjustments, and interest-rate-swap settlements; assess any resulting earnings or regulatory-asset charges.
- How the $442.3 million excess-tax regulatory liability will be refunded, including the unresolved timing for non-plant amounts, and the actual effects of tax changes on cash flow and credit ratings.
- Whether planned debt and equity issuance, 2018 debt maturities, capital spending, pension contributions, and collateral requirements remain manageable alongside dividend commitments.
- Colstrip compliance and retirement developments, associated cost estimates and recovery prospects, and changes in hydroelectric generation or wholesale energy prices.