Avista Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Avista is primarily a regulated electric and natural gas utility, with Alaska utility and other businesses. Financial statements are unaudited; the independent accountant conducted a review, not an audit.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Operating revenue | $319.3 million | $314.5 million | $728.7 million | $751.0 million |
| Income from operations | $53.3 million | $57.9 million | $147.5 million | $175.4 million |
| Net income attributable to Avista shareholders | $25.6 million | $21.8 million | $80.5 million | $83.9 million |
| Diluted EPS | $0.39 | $0.34 | $1.22 | $1.30 |
| Dividends declared per share | $0.3725 | $0.3575 | $0.7450 | $0.7150 |
- Utility gross margin (non-GAAP): Avista Utilities reported $199.2 million for Q2 versus $197.3 million a year earlier; six-month margin was $436.3 million versus $450.1 million. The filing defines gross margin as operating revenue less resource costs.
- Cash flow and investment: Six-month operating cash flow was $275.4 million, compared with $228.5 million; utility capital expenditures were $183.1 million, versus $177.7 million. Cash and cash equivalents were $35.3 million at June 30.
- Debt and liquidity: Total debt in the capital structure was $1.916 billion, or 52.1% of debt plus shareholder equity. Avista had $374.4 million available on its $400 million credit line and AEL&P had $25 million available on its separate facility. Avista reported compliance with its credit covenant, including a 52.1% debt-to-capital ratio against a 65% limit.
- Balance sheet: Total assets were $5.502 billion and total liabilities were $3.739 billion at June 30, 2018.
Changes versus prior comparable periods
- Q2 shareholder earnings rose to $25.6 million from $21.8 million, even as operating income declined. The lower federal tax rate reduced income tax expense; the effective tax rate was 16.9% versus 37.5%. Management attributed the quarterly earnings increase mainly to Avista Utilities and other businesses.
- Six-month shareholder earnings fell to $80.5 million from $83.9 million. Operating revenue declined, reflecting lower natural gas volumes and revenue, customer tax refunds and rate changes, partly offset by general rate increases, customer growth and higher wholesale electric revenue.
- Operating costs increased in several areas, including distribution and transmission, compensation, depreciation and interest. Lower natural gas prices reduced resource costs. The effective tax rate for the half-year was 16.5%, down from 35.6%.
- Other businesses recorded a larger six-month loss, $4.4 million versus $1.9 million, mainly due to a contractor’s insolvency and related subcontractor liability, an investment impairment and losses from equity investments.
- In May, Avista issued $375 million of 4.35% first mortgage bonds due 2048. Proceeds funded $276.2 million of debt maturities, repayment of the credit-line balance and general corporate purposes. The company also settled interest-rate swaps, paying a net $25.9 million.
Outlook, regulatory matters and risks
- Hydro One transaction: The proposed cash acquisition provides $53 per Avista share. As of the filing, management expected closing in Q4 2018, subject to remaining approvals and other conditions. Hydro One’s CEO and board leadership changes prompted additional regulatory review: Washington extended its decision deadline to December 14, 2018, Idaho postponed its technical hearing, and Oregon adopted a revised schedule. Shareholder, FERC, antitrust, CFIUS, Alaska and Montana approvals were reported as obtained; Washington, Idaho and Oregon approvals remained pending. The FCC approval was due to expire November 5, 2018 unless extended. Either side may have termination rights in specified circumstances; the agreement provides for a $103 million termination fee in certain cases.
- State settlement commitments associated with the acquisition would total approximately $78.6 million across jurisdictions if approved, including customer rate credits. Avista stated transaction costs would not be passed through to customers. Washington and Idaho settlements also contemplate using tax benefits to support accelerated depreciation for Colstrip Units 3 and 4 through 2027; the filing says there is no agreement on ultimate closure of those units.
- Tax law and customer rates: The federal corporate tax rate reduction to 21% generated a $437.2 million net regulatory liability for customer refunds and future rate treatment, plus a $19.5 million customer refund liability for the rate/tax timing difference. Management said tax-related customer revenue reductions were generally offset by lower income tax expense. Oregon treatment remained to be determined in a future proceeding. Lower operating cash flow is expected over time from loss of bonus depreciation and the timing of excess deferred-tax refunds.
- Funding outlook: Avista did not expect further long-term debt issuance in 2018 and expected to issue up to $110 million of equity for capital spending, capital structure and other purposes. Management said operating cash flow and available credit were expected to cover planned needs over the next 12 months. It expected $22 million of pension contributions in 2018.
- Regulatory and operating risks: Earnings and cash flow remain exposed to weather and hydroelectric conditions, energy prices and collateral demands, cost recovery and rate-case outcomes, interest rates, pension funding, construction and operating costs, and environmental requirements. The company also cited cyber and operational disruptions, wildfire and severe-weather risks, and potential increases in material costs from tariffs.
- Contingencies: A Washington rate-case judicial review could result in an electric customer refund of up to $9.5 million. A shareholder suit related to the Hydro One transaction remained stayed; other related federal lawsuits had been dismissed. A California market-refund matter was resolved in Avista’s favor. Management reported no significant amounts accrued for unresolved contingencies.
Most important facts for investors to verify
- Whether and when the Hydro One transaction received all remaining regulatory approvals, and whether the $53-per-share terms or expected timing changed.
- The effects of final rate decisions and tax-related customer refunds on revenue, earnings, and cash flow, especially in Oregon and the pending Washington and Idaho proceedings.
- Whether expected equity issuance, capital spending and operating cash flow remain consistent with liquidity and leverage targets.
- Whether weather, power and gas prices, derivative collateral requirements, or credit-rating changes materially affect cash needs.
- The outcome of the Washington rate-case review, the stayed acquisition-related lawsuit, and other disclosed legal, environmental and regulatory matters.