Avista Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; compared with the same 2011 periods. Avista is an energy company whose principal business is its regulated electric and natural-gas utility; it also owns 79% of Ecova, a facility information and energy-management services provider. Interim financial statements are unaudited and were reviewed by Deloitte; the review was not an audit.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Operating revenue | $343.6 | $360.6 | $795.8 | $837.1 |
| Income from operations | $48.3 | $55.5 | $127.0 | $140.3 |
| Net income attributable to Avista | $18.2 | $23.0 | $56.6 | $64.9 |
| Diluted EPS | $0.31 | $0.39 | $0.96 | $1.12 |
| Dividends per common share | $0.29 | $0.275 | $0.58 | $0.55 |
- Revenue fell about 4.7% in Q2 and 4.9% in the first half; Avista-attributable net income declined about 21% and 13%, respectively. Operating margin, calculated as operating income divided by revenue, was approximately 14.1% in Q2 2012 versus 15.4% in Q2 2011, and 16.0% versus 16.8% for the first half.
- Management attributed lower utility earnings mainly to warmer weather and reduced retail loads, weak economic conditions and lower usage by some industrial customers, alongside higher depreciation and interest expense. Rate increases and lower utility operating expenses partly offset the decline. Spokane heating degree days were down 21% year over year in Q2 and 9% for the first half.
- Utility gross margin was $157.8 million in Q2, down from $164.6 million; first-half utility gross margin was $352.7 million, down from $354.7 million. Utility net income was $18.0 million in Q2 and $57.5 million in the first half, versus $21.0 million and $61.2 million, respectively.
- Non-utility revenue grew with the Prenova and LPB acquisitions, but acquisition-related amortization, integration and operating costs weighed on results. Ecova net income attributable to Avista was $1.1 million in Q2 and $0.3 million in the first half, versus $1.8 million and $3.5 million. Other businesses posted losses, mainly reflecting litigation costs related to former Avista Energy operations and investment losses.
Cash flow, balance sheet and funding
- First-half operating cash flow was $199.7 million, up from $163.5 million. Investing used $182.5 million, including $120.5 million of utility capital expenditures and $50.3 million paid for LPB. Financing provided $1.5 million. Cash ended the period at $93.4 million, compared with $74.7 million at year-end 2011.
- At June 30, total assets were $4.216 billion and total liabilities $2.947 billion; Avista stockholders’ equity was $1.217 billion. Current assets were $555.4 million and current liabilities $584.6 million. These include client funds and matching obligations associated with Ecova, so headline current balances should be interpreted in that context.
- Total debt in management’s capital-structure presentation was $1.391 billion, or 53.3% of total debt and Avista stockholders’ equity, compared with $1.371 billion and 53.6% at year-end 2011. Avista’s $400 million revolving facility had $91.0 million drawn and $25.1 million of letters of credit outstanding, leaving $283.9 million available. Its debt-to-capitalization covenant limit was 65%; Avista reported compliance.
- Ecova had $60 million drawn under its credit line at June 30. In July, it replaced that facility with a new five-year, $125 million committed line. Avista’s ratings were BBB from S&P and Baa2 from Moody’s; management noted that ratings affect funding access, costs and collateral requirements.
Outlook, material developments and risks
- Avista expected utility capital expenditures of about $250 million annually for 2012–2014. It planned to issue up to $45 million of common stock during 2012, primarily in the second half. No specific earnings or EPS guidance is provided in the filing text.
- Avista agreed to issue $80 million of 4.23% First Mortgage Bonds due 2047, with closing expected in November 2012; proceeds were intended partly to repay credit-line borrowings. In May, it paid $18.5 million to settle $75 million notional of interest-rate swaps related to the bond pricing; the cost is to be amortized over the forecast interest-payment period.
- Washington utility rate cases filed in April 2012 sought annual revenue increases of $41.0 million for electric service and $10.1 million for natural gas, plus a one-year electric rate reduction to return $13.6 million of ERM deferred balances. These were requests, not approved rates. Avista expected an Idaho rate case filing in the second half of 2012. Management also highlighted proposed changes to Washington’s power-cost recovery mechanism and the possibility of electric decoupling.
- Avista expected to contribute $44 million to its pension plan in 2012; $29.4 million had been contributed by June 30. Pension assets were below the plan benefit obligation. The filing identifies actuarial assumptions, especially discount rates and asset returns, as factors that could affect future funding.
- Energy-market risks include commodity-price volatility, hydroelectric conditions, outages, customer demand and counterparty performance. At June 30, Avista had posted $19.0 million cash collateral and $17.5 million of letters of credit for energy derivatives. A downgrade below investment grade could prompt additional collateral demands; the filing gives differing exposure estimates under differing contract assumptions.
- Material contingencies include long-running FERC proceedings relating to western energy-market refunds. Management did not expect California refunds to cause a material loss based on current information, but could not predict the outcome or potential impact of the Pacific Northwest proceeding. A July 2012 notice from environmental groups alleged Clean Air Act violations at Colstrip; the company said it could not yet assess potential liability. Spokane River water-quality mitigation costs also could not yet be estimated.
- Other uncertainties include environmental and emissions regulation, hydroelectric licensing and fish-passage obligations, regulatory recovery of costs, economic conditions, and possible changes to derivatives regulation. Management said it intended to seek recovery through rates for appropriate utility costs, but recovery and timing depend on regulators.
Most important facts for investors to verify
- Whether Washington and Idaho rate requests, including ERM and any decoupling changes, are approved and what the resulting earnings and cash-flow effects are.
- Whether retail demand and utility gross margin recover from the weather- and economy-related declines, and whether capital spending remains near the stated plan.
- Ecova’s post-acquisition organic growth, integration costs, profitability, debt usage and ability to fund further expansion.
- Completion and use of proceeds for the planned $80 million bond issuance and the planned common-stock issuance; monitor debt, liquidity and interest costs.
- Developments in FERC refund matters, Colstrip environmental claims and Spokane River mitigation, including any newly estimable liabilities or cost-recovery outcomes.
- Collateral requirements and pension contributions, particularly if energy prices, credit ratings, interest rates or plan assumptions change.