Avista Corporation — Q3 2022 Form 10-Q
Business and period: Regulated electric and natural gas utility operations in the Pacific Northwest and Alaska, with smaller non-utility businesses. This unaudited filing covers the three and nine months ended September 30, 2022; comparisons are with 2021. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Operating revenue | $359.4 | $296.0 | $1,200.1 | $1,007.1 |
| Operating income | $19.4 | $24.2 | $126.7 | $157.9 |
| Net income (loss) | $(5.8) | $14.4 | $77.2 | $96.5 |
| Diluted EPS | $(0.08) | $0.20 | $1.06 | $1.38 |
| Avista Utilities margin* | $203.3 | $185.6 | $678.0 | $649.7 |
*Utility margin is a non-GAAP measure defined as utility operating revenue less resource costs.
- Drivers and costs: Revenue rose in both periods, reflecting higher wholesale power and gas prices and sales, rate increases, customer growth, and usage. Resource costs, other operating expenses, depreciation, and interest expense also increased. Management attributed lower earnings primarily to these higher costs; lower investment gains also reduced results at other businesses.
- Cash flow: Operating cash flow was $210.4 million for the nine months, versus $228.9 million in 2021. Investing used $340.3 million, including $331.3 million of utility capital expenditures; financing provided $122.1 million. Cash ended the period at $14.4 million.
- Debt and liquidity: Total debt, including current debt and leases, was $2.73 billion, or 55.0% of total capitalization, versus $2.60 billion and 54.7% at year-end 2021. Short-term borrowings were $268 million. Avista reported $101.7 million available under its $400 million credit facility and $25 million available under AEL&P’s facility; it said liquidity was adequate for the next 12 months.
- Capital and dividends: Utility capital expenditures were $331.3 million year to date. Avista expects approximately $475 million annually in 2022–2024. It issued $93.0 million of common stock in the first nine months and expected $135 million of issuance for 2022, including amounts already issued. Dividends paid were $96.3 million year to date.
- Margins: Avista Utilities’ electric margin increased $15.8 million in Q3 and $21.4 million year to date; natural gas margin increased $1.8 million and $6.9 million, respectively. These gains did not offset the overall increase in expenses.
Material changes, outlook, and risks
- Q3 net results shifted to a loss from prior-year income; nine-month net income also declined. The filing cites higher operating costs, depreciation and interest expense, partly offset by higher utility margin. The 2021 comparison also included higher investment gains at other businesses.
- Management said inflation is raising commodity, labor, benefits, vehicle-fuel and financing costs. Supply-chain delays continued, with limited impact to date, but could delay or increase the cost of projects. Commodity costs are generally subject to regulatory recovery mechanisms, though recovery may lag purchases and may include customer/company sharing.
- Management expects a negative 17.8% effective tax rate for full-year 2022. It did not provide an earnings or EPS forecast in the supplied filing text. It expected to arrange an additional short-term credit facility of up to $50 million in Q4 2022.
- A Washington multi-year rate-case settlement was pending WUTC approval; a final ruling was expected by December 2022. Avista expected to file Idaho electric and gas rate cases in Q1 2023 and an Oregon gas case in the first half of 2023. Alaska regulators approved a 4.5% interim rate increase effective September 2022; a further permanent increase was requested.
- Key exposures include wildfire litigation, with the company unable to estimate the likelihood or potential loss in several cases; Colstrip co-owner disputes and arbitration, with CETA limiting delivery of coal-fired power to Washington customers after 2025; and possible cost impacts from climate rules. Avista’s 10-year wildfire resiliency plan is expected to cost about $330 million, with recovery sought through future rate filings.
- Energy-market volatility can increase collateral needs. At September 30, Avista had posted $59.9 million cash collateral and $26 million in letters of credit for energy contracts. A downgrade below investment grade could require additional collateral; the company estimated $6.4 million under contractual thresholds or $11.3 million without them.
Important facts for investors to verify
- Final outcomes and timing of Washington, Alaska and upcoming Idaho and Oregon rate proceedings, including approved recovery of capital and commodity costs.
- Developments and potential exposure in wildfire claims, particularly the Babb Road, Boyds and Road 11 matters.
- Colstrip arbitration, co-owner disputes, CETA compliance plans and the implications of PSE’s agreed transfer of its ownership interest to Talen at the end of 2025.
- Whether planned debt and equity financing, the expected short-term facility and capital spending remain consistent with management’s liquidity assessment.
- How inflation, commodity prices, regulatory lag and collateral requirements affect cash flow and earnings as costs are recovered through rates.