Avista Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 25, 2015. This is an annual report, not a standalone fourth-quarter filing. Avista is principally a regulated electric and natural gas utility serving the Pacific Northwest, with Alaska operations added through its July 2014 acquisition of AERC.
Financial performance and position
| Metric | 2014 | 2013 |
|---|---|---|
| Operating revenue | $1.473 billion | $1.442 billion |
| Income from continuing operations | $119.9 million net; $192.1 million before tax | $104.3 million net; $162.3 million before tax |
| Net income attributable to Avista shareholders | $192.0 million | $111.1 million |
| Diluted EPS | $3.10 total; $1.93 continuing operations | $1.85 total; $1.74 continuing operations |
| Avista Utilities gross margin (non-GAAP) | $741.2 million | $714.4 million |
| Cash from operating activities | $267.3 million | $242.6 million |
| Utility capital expenditures (cash basis) | $325.5 million | $294.4 million |
| Cash and cash equivalents at year-end | $22.1 million | $82.6 million |
| Total debt in capital structure | $1.656 billion; 52.8% of capitalization | $1.559 billion; 54.6% of capitalization |
Avista Utilities’ net income increased to $113.3 million from $108.6 million. Management cited rate increases, lower net power costs and lower interest expense, partly offset by Idaho earnings-sharing provisions and higher operating, depreciation and tax costs. Electric gross margin rose $26.0 million, while natural gas gross margin was nearly flat. Operating cash flow exceeded 2013, but remained below utility capital spending. The $400 million parent credit facility had $262.4 million available at year-end; the company reported compliance with its 65% debt-to-capitalization covenant.
Material changes and unusual items
- Ecova sale: Sold June 30, 2014 for $335 million cash, subject to adjustments. The sale produced a $69.7 million net gain and $229.9 million of cash proceeds reported in investing activities; estimated total net proceeds after taxes and other payments were $143.5 million, including escrow amounts expected later. Ecova results are reported as discontinued operations.
- AERC acquisition: Completed July 1, 2014, adding Alaska Electric Light and Power (AEL&P); only the second half of 2014 is included in reported results. Avista issued about 4.5 million shares, with fair value of consideration of $154.8 million, and recorded $52.7 million of goodwill. AEL&P contributed $3.2 million of net income in the included period.
- Non-utility settlement: A California power-markets litigation settlement generated $15.0 million of pre-tax earnings; Avista contributed $6.4 million of proceeds to the Avista Foundation.
- Capital allocation: Avista repurchased 2.53 million shares for $79.9 million in 2014. Annual dividends declared rose to $1.27 per share from $1.22. The board later raised the quarterly dividend to $0.33 per share.
Total earnings growth substantially reflects the Ecova disposal gain and other nonrecurring items; continuing-operations EPS increased less than total EPS. Investors should distinguish recurring utility earnings from sale and litigation proceeds.
Outlook, regulation and risks
- Management forecast 2015–2018 average annual customer growth of 1.2% for electric and 1.0% for natural gas, with load growth of 0.8% and 1.3%, respectively. The 2013 resource plan projected a need for 575 MW of additional natural-gas generation between 2020 and 2033; these are planning estimates, not firm commitments.
- Avista Utilities expected capital expenditures of about $375 million in 2015 and $350 million in 2016; AEL&P expected about $15 million annually in 2015 and 2016. The company expected to issue approximately $125 million of long-term debt in 2015 and said operating cash flow plus credit availability should fund planned spending, dividends and commitments.
- Washington rate-case settlements effective January 1, 2015 provided base-revenue increases of $12.3 million for electric and $8.5 million for gas, with customer rebates affecting billed-rate changes. Five-year electric and gas decoupling mechanisms also began. Avista filed further Washington rate increases in February 2015; those requests remained subject to regulatory review.
- Oregon’s regulator rejected a proposed natural-gas rate settlement in February 2015, requiring further proceedings. Idaho base rates were held unchanged through 2015 under a rate-plan extension, with earnings-sharing and deferral provisions.
- Key operating exposures include weather and hydroelectric output, wholesale power and gas prices, regulatory cost recovery, financing costs and collateral calls. Year-end interest-rate swap exposure was significant: the company disclosed a net interest-rate derivative liability of $76.6 million in its risk discussion, with potential cash collateral needs if ratings or market conditions worsen.
- Environmental and legal matters include a Clean Air Act/New Source Review lawsuit involving the jointly owned Colstrip plant; management considered a loss reasonably possible but could not estimate an outcome or material effect. Proposed federal greenhouse-gas limits, coal-ash rules and possible state carbon policies could raise costs; impacts were not quantifiable. A diesel spill at Kettle Falls was under voluntary cleanup and was not expected to be material.
- AEL&P depends heavily on the Snettisham hydroelectric project, which supplies about two-thirds of Juneau-area electricity. Its take-or-pay agreement runs through 2038; the related capital-lease obligation was $70 million at year-end, payable regardless of project output.
- Project Compass customer-information and work-management systems went into service in February 2015. The filing identifies risks of billing errors, disruption and unplanned costs. Management reported effective disclosure controls and internal control over financial reporting, but AERC was excluded from the internal-control assessment while integration continued.
Important facts for investors to verify
- How much of 2014 earnings and cash available for shareholder returns is recurring utility performance versus the Ecova gain and California settlement.
- Progress and final outcomes in the Washington and Oregon rate cases, Idaho earnings-sharing true-ups, and recovery of capital investments and deferred costs.
- Whether planned capital spending, debt issuance and dividend commitments remain supportable given cash balances, collateral requirements and interest-rate swap exposure.
- Potential financial and operating effects of Colstrip litigation and environmental requirements, including coal-ash and greenhouse-gas rules.
- AEL&P integration and performance, the Snettisham agreement’s costs and reliability, and completion of the acquired business’s internal-control integration.
- Auditor Deloitte issued unqualified opinions on the financial statements and on internal control for the assessed company; AERC was excluded from the internal-control audit scope.