AVISTA CORP quarterly report, Q3 FY2023

Business context and reporting period

Avista Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2023. The company is principally a regulated electric and natural gas utility operating in the Pacific Northwest and Alaska, with smaller non-utility businesses. The interim financial statements received an accountant’s review, not an audit.

Financial performance and position

Q3 utility margin, a company-defined non-GAAP measure, was $222.9m versus $203.3m. Nine-month utility margin was $719.5m versus $678.0m. Nine-month capital expenditures were $359.3m, compared with $331.3m.

At September 30, total assets were $7.47bn, total liabilities $5.06bn, and shareholders’ equity $2.41bn. Total debt, including short-term borrowings and leases, was $2.92bn, or 54.8% of total capitalization. Cash was $8.6m; current assets were $547.2m and current liabilities $583.5m. Available liquidity was reported at $275.4m on Avista Corp.’s committed line, $41.0m under its letter-of-credit facility, and $23.5m under AEL&P’s line.

Material changes versus comparable periods

• Q3 net income improved from a loss to a profit, mainly on higher utility revenues and income tax benefits. The nine-month increase reflected higher utility revenues and lower resource costs, partly offset by higher interest and operating expenses and depreciation.
• Q3 revenue growth reflected higher electric wholesale revenue, retail rates, natural gas usage, and decoupling revenue. For the nine-month period, natural-gas retail revenue rose substantially, while lower fuel-sale and natural-gas wholesale revenue partly offset growth.
• Interest expense increased to $34.8m in Q3 from $29.5m and to $104.9m for nine months from $86.1m, amid higher rates and borrowings. The nine-month effective tax benefit was $16.2m versus $11.7m in 2022.
• Operating cash flow rose by $182.9m, substantially reflecting lower derivative collateral requirements, lower receivables, interest-rate-swap settlement receipts, and lower pension contributions; reduced accounts payable partly offset the increase.
• Short-term borrowings fell to $221.5m from $463.0m at year-end 2022. Long-term debt rose to $2.53bn from $2.28bn, including a March issuance of $250m in 5.66% first-mortgage bonds due 2053.
• Common shares outstanding increased to 77.4m from 74.9m at year-end, with $88.2m of net share issuance in the first nine months. Dividends paid were $105.2m; dividends declared were $1.38 per share for the nine-month period.

Outlook, management commentary, risks and unusual items

• Management said unusually rapid snowmelt after historically high May–June temperatures sharply reduced hydroelectric generation, requiring more thermal generation and purchased power and limiting resource optimization. It affected the Washington Energy Recovery Mechanism and results.
• Management expects adequate liquidity for the next 12 months. It expected 2023 common-stock issuance of $120m in total, including $88.2m already issued, and projected 2024 issuance of $60m of stock and $80m of debt. No additional long-term debt issuance was expected in 2023.
• Avista Utilities’ projected capital expenditures: $475m in 2023, $500m in 2024, $525m in 2025, and $550m in 2026. Management expected no further pension contribution in 2023 after contributing $10m; projected contributions total $40m during 2024–2027.
• Rate outcomes included Idaho increases effective September 2023 and September 2024; Oregon natural-gas rates designed to raise annual base revenue $7.2m from January 2024; and Alaska electric rates with a 6% base-revenue increase effective October 2023. Avista expected to file its next Washington electric and gas rate cases in Q1 2024.
• Management cited persistent inflation, higher-than-authorized interest costs, and regulatory lag. Washington’s Climate Commitment Act began in 2023; the company expects minimal initial electric impact but additional Washington natural-gas compliance costs, which it expects to defer or seek recovery for through regulation.
• Avista agreed to transfer its 15% ownership in Colstrip Units 3 and 4 to NorthWestern on December 31, 2025, with no monetary consideration, subject to approvals and other conditions. The company expects no material financial impact and retains its Colstrip transmission assets.
• Material uncertainties include wildfire litigation and claims (including Babb Road and Boyds), an Idaho fire investigation, Colstrip-related disputes and coal-supply litigation, and potential environmental and regulatory outcomes. The company said it could not estimate the likelihood or potential loss for several proceedings. Commodity-price movements or a credit downgrade could also increase collateral needs.
• Other notable items: the Q3 income tax benefit helped drive the year-over-year earnings improvement; non-utility businesses recorded a nine-month net loss of $2.6m, versus $7.7m net income in 2022, primarily reflecting investment-value declines.

Key investor verification points

1. Verify the durability and regulatory recovery of earnings given weak hydroelectric generation, power-cost deferrals, and upcoming rate cases.
2. Track actual capital spending, financing needs, interest costs, share issuance, and liquidity relative to management’s projections.
3. Assess wildfire and other legal exposure as investigations and litigation progress; several potential losses remain unquantifiable in the filing.
4. Monitor the Colstrip transfer conditions, approvals, operating and remediation obligations, and coal-supply developments.
5. Review the evolution of Climate Commitment Act costs, customer recovery, and collateral requirements under energy-market and credit stress.