Avista Corporation — Q3 2012 Form 10-Q
Business context and period. Avista is a regulated electric and natural-gas utility in the Pacific Northwest, with non-utility businesses including Ecova, a facility information and energy-management services provider. This unaudited quarterly report covers the three and nine months ended September 30, 2012; balance-sheet comparisons are to December 31, 2011. Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $340.6 | $343.7 | $1,136.5 | $1,180.9 |
| Operating income | $30.0 | $34.9 | $157.0 | $175.2 |
| Net income attributable to Avista | $5.8 | $10.7 | $62.4 | $75.6 |
| Diluted earnings per share | $0.10 | $0.18 | $1.06 | $1.30 |
| Dividends per share | $0.29 | $0.275 | $0.87 | $0.825 |
- Operating margin, calculated as operating income divided by revenue, was approximately 8.8% in Q3 2012 versus 10.1% a year earlier, and 13.8% for the first nine months versus 14.8%.
- Utility gross margin rose to $138.7 million from $130.6 million in Q3 and to $491.4 million from $485.3 million year to date. Avista Utilities’ attributable earnings were $7.7 million for Q3, versus $7.6 million, and $65.2 million year to date, versus $68.7 million.
- Cash from operations was $257.4 million for the first nine months, compared with $240.4 million. Investing used $229.1 million; financing used $20.1 million. Cash increased $8.3 million to $83.0 million. Utility capital expenditures were $178.4 million; operating cash flow less utility capital expenditures was approximately $79.0 million.
- At September 30, cash was $83.0 million, current assets $516.3 million, and current liabilities $547.9 million. Total debt, including borrowings and nonrecourse debt, was $1,376.3 million; Avista stockholders’ equity was $1,259.7 million. Debt was 52.2% of debt plus Avista stockholders’ equity, down from 53.6% at year-end and below the 65% credit-facility covenant limit.
- Avista had $291.2 million available under its $400 million committed credit line; $82.0 million was drawn and $26.8 million of letters of credit were outstanding. Ecova had $58.0 million drawn under its new $125 million facility. Pension contributions were $44 million year to date, with no further 2012 contributions planned.
Material changes and management commentary
- Revenue declined 0.9% in Q3 and 3.8% year to date; Avista-attributable net income fell 45.9% and 17.5%, respectively. Lower utility revenue, particularly from natural-gas wholesale sales and fuel sales, was partly offset by lower resource costs and higher non-utility revenue.
- Utility Q3 earnings were slightly higher, aided by warmer weather that increased electric cooling loads and by rate increases. Year-to-date utility earnings declined amid lower first-half retail loads, higher operating costs, depreciation, taxes and interest, partly offset by rate increases and lower resource costs. Management cited a weak regional economy and lower usage at some industrial customers.
- Ecova revenue grew following its acquisitions of Prenova and LPB, but earnings fell: attributable income was $0.6 million in Q3 and $1.0 million year to date, versus $3.5 million and $7.0 million. Management cited slower-than-expected organic growth, delayed customer implementation, acquisition integration costs and higher operating and amortization expenses.
- Other businesses recorded a $2.4 million pretax investment impairment/write-off related to a fuel-cell investment and a solar-energy company; increased legacy Avista Energy litigation costs also weighed on results.
- Common shares issued during the first nine months generated $28.7 million net of costs, including $23.7 million through sales-agency agreements. The company did not expect further sales-agency issuance in 2012 and expected to issue up to $50 million of stock in 2013 to maintain its capital structure. An $80 million, 4.23% first-mortgage bond issue due 2047 was scheduled to close in November 2012, with proceeds intended partly to repay credit-line borrowings.
Outlook, risks and contingencies
- Management expected utility capital expenditures of about $250 million in 2012 and $260 million annually in 2013 and 2014. It stated that operating cash flow and available credit were expected to fund capital spending, dividends and other commitments; actual needs and financing access remain subject to market and operating conditions.
- A Washington rate-case settlement filed in October, subject to WUTC approval, proposed electric and gas base-rate increases effective in 2013 and 2014, with electric customer credits from the ERM deferral balance. Avista filed Idaho rate increases in October; those requests remained subject to IPUC review. These are proposals, not final approved rates.
- Weather, hydroelectric output, wholesale power and gas prices, regulatory cost recovery, customer demand, financing access, credit ratings, pension assumptions and environmental requirements could affect results and liquidity. Energy-market volatility can also increase collateral demands; the filing estimated up to $32.5 million of additional collateral under certain derivative credit triggers.
- Legacy California and Pacific Northwest energy-market refund proceedings remained unresolved. Management did not expect a material loss from the California refund period based on information then available, but could not predict potential Pacific Northwest refunds. A FERC order dated November 2, 2012 dismissed Avista Utilities from the Summer Period California proceeding; that development occurred after quarter-end.
- Avista was evaluating notices alleging Clean Air Act violations at Colstrip, including requests for injunctive relief and penalties; the outcome was not predictable. Other environmental and licensing matters include Colstrip remediation and Spokane River and Cabinet Gorge hydroelectric requirements. Management said some potential costs could not yet be estimated and expected to seek regulatory recovery where appropriate.
- On October 22, 2012, Avista announced a voluntary severance program, with expected terminations by year-end and cash payments by February 1, 2013. The fourth-quarter expense could not yet be reasonably estimated.
- No specific earnings guidance was provided in the supplied filing text. Management’s forward-looking statements were subject to the risks described above and in the filing.
Important facts for investors to verify
- Whether Washington’s proposed rate settlement and Idaho rate requests were approved, and the eventual timing and revenue impact of new rates.
- Whether Ecova’s acquisitions deliver the expected growth and integration benefits, and whether its slower organic growth and higher costs persist.
- Final 2012 capital spending, the 2013 equity issuance plan, completion and use of proceeds of the $80 million bond issue, and compliance with credit covenants.
- Developments and any liabilities or recoveries from energy-market refund proceedings, Colstrip litigation or environmental matters, and hydroelectric licensing requirements.
- The financial impact of the severance program, future pension funding needs and any changes in collateral requirements or access to capital.
The interim financial statements were reviewed by the independent registered public accounting firm, not audited; its review report expressed no audit opinion.