Avista Corporation — Q3 2013 Form 10-Q
Business context and period. Avista is an energy company whose principal business is regulated electric and natural-gas utility operations in the Pacific Northwest; it also owns 78.9% of Ecova, a facility and energy cost-management services provider. This unaudited quarterly filing covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. The interim statements were reviewed by Deloitte, not audited.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Operating revenue | $335.9 million | $340.6 million | $1,170.8 million | $1,136.5 million |
| Income from operations | $35.3 million | $26.6 million | $178.1 million | $149.0 million |
| Net income attributable to Avista shareholders | $11.4 million | $5.8 million | $79.4 million | $62.4 million |
| Diluted EPS | $0.19 | $0.10 | $1.32 | $1.06 |
| Operating margin | 10.5% | 7.8% | 15.2% | 13.1% |
Operating margin is calculated as income from operations divided by operating revenue. Despite lower Q3 revenue, operating income and shareholder earnings rose. Nine-month utility gross margin, a company-presented non-GAAP measure, increased to $521.4 million from $491.4 million: electric gross margin was $417.6 million versus $391.1 million, and natural-gas gross margin was $103.8 million versus $100.3 million.
- Revenue and earnings drivers: Q3 utility revenue fell $13.6 million, while Ecova revenue grew $7.8 million to $46.4 million. Lower utility resource costs, Washington rate increases and warmer weather that lifted cooling demand supported Q3 earnings. Ecova’s results included a $2.3 million contract milestone rebate. Nine-month utility results benefited from rate increases, warmer summer weather and a $5.1 million net benefit from the Bonneville Power Administration settlement. Nine-month Ecova revenue increased $17.7 million.
- Cash flow: Nine-month operating cash flow was $202.4 million, down from $257.4 million. Utility property capital expenditures were $220.7 million; total capital expenditures were $222.4 million. Operating cash flow was therefore below utility capital spending. Cash dividends paid were $55.0 million, or $0.915 per share, versus $51.2 million, or $0.87 per share, in 2012. Cash and equivalents were $92.0 million at September 30.
- Debt and liquidity: Total debt, including current debt and borrowings, was $1.512 billion, or 54.0% of debt plus Avista shareholder equity, compared with $1.419 billion and 53.0% at year-end 2012. The $400 million committed Avista credit facility had $66.0 million drawn and $28.0 million in letters of credit, leaving $306.0 million available. Avista reported compliance with its 65% debt-to-capital covenant. Ecova had $50.0 million drawn on its $125 million facility and reported $31.5 million of additional borrowing capacity under its covenant calculation.
Material changes, outlook and commentary
- In August, Avista borrowed $90 million at 0.84%, maturing in 2016; proceeds helped refinance corporate indebtedness ahead of $50 million of bonds maturing in December 2013. Management expected to issue up to $190 million of long-term debt in 2014.
- Utility capital expenditure estimates were approximately $280 million for 2013, $335 million for 2014 and $360 million for 2015, increased from prior 2014–15 estimates to address reliability and system investment needs. A customer information and work management systems project was expected to cost about $80 million over its term and finish by end-2014.
- Avista agreed on November 4, 2013 to acquire Alaska Energy and Resources Company for consideration of $170 million, less indebtedness and subject to adjustments, primarily funded with Avista shares. Closing was expected by July 1, 2014, subject to regulatory and other conditions. Management expected a slight earnings dilution in 2014 and positive contribution in 2015; it anticipated up to $145 million of Avista stock issuance associated with the transaction.
- Washington and Idaho rate settlements provided phased rate changes, including increases effective in 2013 and 2014; the company intended to file rate cases in both states in 2014 for rates effective in 2015. An Oregon natural-gas rate case filed in August 2013 sought a 9.8% overall billed-rate increase, designed to add $9.5 million in annual revenue; no outcome was reported.
- Colstrip Unit 4 suffered an unplanned outage in July and was not expected back until Q1 2014. Avista estimated its share of repair costs proportionately and forecast an approximately $6–$7 million negative 2013 gross-margin impact after customer recovery mechanisms. Insurance claims were filed; the ultimate repair-cost allocation between capital and expense remained undetermined.
- Regulatory and legal matters include California and Pacific Northwest energy-market refund proceedings, a Clean Air Act lawsuit involving Colstrip co-owners, and environmental and hydroelectric-license obligations. The company could not predict the Pacific Northwest proceeding’s outcome or potential refund exposure; it did not expect California refunds to be material based on information then available.
- Commodity costs, weather, generation availability, wholesale prices, regulatory cost recovery, financing access, environmental rules and counterparty credit were identified as material risks. A downgrade below investment grade could increase collateral demands; disclosed estimates differ by contractual assumptions.
Important facts for investors to verify
- Whether utility rate increases and regulatory recovery keep pace with rising capital investment and operating costs, and the outcomes of the planned rate cases.
- Colstrip Unit 4’s return-to-service timing, repair costs, insurance recovery and final customer-versus-shareholder cost impact.
- Actual 2014 funding and dilution from the proposed AERC acquisition, including regulatory approvals and closing adjustments.
- Liquidity and cash generation relative to planned capital expenditures, dividends, debt maturities and potential collateral calls.
- Developments in the FERC refund proceedings, Colstrip environmental litigation and other regulatory contingencies.
- The durability of Ecova’s revenue growth and contribution, including the effect of the one-time $2.3 million milestone rebate.
The filing also corrected the classification of certain 2012 operating expenses; management stated the correction had no effect on net income or EPS.