AVISTA CORP quarterly report, Q3 FY2011

Avista Corporation — Q3 2011 Form 10-Q

Business context and reporting period. Avista is an energy company whose principal business is regulated electric and natural gas service in the Pacific Northwest; it also owns Ecova, a facility and energy-management services business. This unaudited report covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. The interim financial statements were reviewed by Deloitte, not audited.

Financial results and position

Metric	Q3 2011	Q3 2010	Nine months 2011	Nine months 2010
Operating revenues	$343.7 million	$367.2 million	$1,180.9 million	$1,184.3 million
Income from operations	$34.9 million	$37.7 million	$175.2 million	$167.3 million
Net income attributable to Avista	$10.7 million	$12.3 million	$75.6 million	$66.7 million
Diluted EPS	$0.18	$0.22	$1.30	$1.20
Operating cash flow	Not separately reported for quarter	Not separately reported for quarter	$240.4 million	$201.7 million

Q3 operating revenue fell 6.4% year over year, while net income attributable to Avista declined 13.3%. The quarter’s operating margin was $34.9 million, versus $37.7 million.
Nine-month revenue was nearly flat, but operating income rose 4.7% and Avista-attributable net income rose 13.4%. Diluted EPS increased from $1.20 to $1.30 despite higher weighted-average shares.
Utility gross margin increased to $485.3 million for nine months from $452.8 million. The improvement reflected colder heating-season weather, rate increases and lower power-supply costs relative to base rates. Q3 utility gross margin was essentially unchanged at $130.6 million.
Nine-month cash from operations was $240.4 million; investing used $167.7 million and financing used $64.0 million. Utility capital expenditures were $169.6 million, and cash dividends were $47.7 million. Cash and equivalents were $78.1 million at September 30.
At September 30, total debt was $1.290 billion, or 52.4% of debt plus Avista stockholders’ equity, versus 54.0% at year-end 2010. Total liabilities were $2.746 billion and equity was $1.170 billion. Current assets of $548.3 million were below current liabilities of $576.6 million.
Avista had $96.5 million drawn on its $400 million committed credit facility and $14.9 million of letters of credit outstanding, leaving $288.6 million of available liquidity. The company reported compliance with its 65% debt-to-capital covenant.

Material changes and management commentary

Q3 utility earnings declined to $7.6 million from $9.1 million, mainly from higher operating costs, depreciation and taxes. Nine-month utility earnings rose to $68.7 million from $60.9 million, principally due to stronger gross margin.
Ecova’s attributable earnings rose to $7.0 million for nine months from $5.9 million, supported by energy-management growth and the Loyalton acquisition. Ecova managed $14.2 billion of bills, up 8% year over year. Its Q3 results included a $0.7 million favorable state sales-tax adjustment.
Operating costs increased in areas including utility maintenance, pensions and postretirement benefits, labor, depreciation and property taxes. Planned major maintenance at Colstrip contributed to higher utility expenses.
Avista paid $0.825 per common share in dividends in the first nine months, versus $0.75 in 2010. It issued $21.2 million of common stock during the period and expected to issue up to $25 million for 2011.

Outlook, risks and contingencies

Management expected 2011 utility capital expenditures of about $235 million, with approximately $250 million annually in 2012 and 2013. It stated available operating cash and credit were expected to fund near-term needs.
In October 2011, Avista agreed to issue $85 million of 4.45% First Mortgage Bonds due 2041, with closing expected in December; proceeds were intended to repay part of credit-line borrowings. This is a subsequent event, not a September 30 balance-sheet debt issuance.
Management estimated pension contributions of $176 million for 2012–2015, or $44 million annually, up from its prior estimate of $110 million total. The increase followed lower plan-asset values and a lower discount rate. No further 2011 contribution was planned after the $26 million paid to date.
A Washington rate-case settlement, subject to WUTC approval, proposed average base-rate increases effective January 1, 2012 of 4.6% for electric service and 2.4% for natural gas. Idaho rate adjustments became effective October 1, 2011; combined adjustments resulted in stated customer-rate decreases of 2.4% for electric and 0.8% for gas.
Avista entered a 30-year wind power purchase agreement, with expected deliveries beginning in the second half of 2012. The project is expected to have 100 MW nameplate capacity and produce about 40 average MW. The 2011 resource plan also projects an additional 42 average MW of wind or renewable credits annually by 2021 and 750 MW of new gas-fired generation between 2018 and 2031.
Commodity price movements, weather and hydroelectric availability, regulatory cost recovery, outages, financing access and credit ratings remain material risks. A downgrade below investment grade could trigger collateral requirements; management estimated up to $128 million of additional collateral under specified energy-price and downgrade assumptions.
Regulatory and legal matters include California energy-market refund proceedings and a reopened Pacific Northwest refund proceeding; the company said it could not predict the latter’s outcome or potential impact. It did not expect California refunds to be material. Other matters include Spokane River water-quality mitigation with costs not yet estimable, environmental site investigations, and personal-injury and fire claims that management did not expect to be material based on then-known information.
Federal and state greenhouse-gas, air-quality, coal-ash and renewable-energy requirements could increase costs or constrain generation; the company said it could not estimate some potential compliance costs. Dodd-Frank implementation may also affect derivative costs and practices, but the ultimate impact was not predictable.

Important facts for investors to verify

Whether the Washington rate settlement received regulatory approval and the resulting realized rates and earnings.
Whether the planned $85 million bond issuance closed as expected and how proceeds affected credit-line borrowings and interest expense.
Actual pension funding requirements and the sensitivity of future contributions to asset returns and actuarial assumptions.
Developments in power-cost deferrals, regulatory recovery, and potential collateral needs under adverse commodity-price or credit-rating scenarios.
Progress and potential cost exposure in the Pacific Northwest refund, water-quality, environmental and other legal proceedings.
Whether Ecova minority holders exercise redemption rights before they expire July 31, 2012, and how any redemption would be funded.