Avista Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Avista is primarily a regulated electric and natural gas utility serving the Pacific Northwest and Alaska. Unless noted, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Operating revenue | $272.6 | $283.8 | $941.5 | $981.1 |
| Income from operations | $28.5 | $30.2 | $145.6 | $137.1 |
| Net income attributable to Avista shareholders | $4.9 | $5.1 | $70.8 | $146.2 |
| Diluted earnings per share | $0.07 | $0.08 | $1.04 | $2.21 |
- Q3 operating margin was 10.4% of revenue, versus 10.7% a year earlier. Nine-month operating margin was 15.5%, versus 14.0%.
- Avista Utilities’ non-GAAP utility margin was $185.7 million in Q3, up from $176.5 million; nine-month margin was $634.6 million, up from $616.8 million.
- Nine-month operating cash flow was $282.5 million, down from $340.5 million. Utility capital expenditures were $297.8 million, implying approximately $15.3 million of operating cash flow after those expenditures.
- Cash and equivalents were $84.7 million at September 30, 2020, versus $9.9 million at year-end 2019. Total debt, including current debt and leases, was $2.39 billion; shareholders’ equity was $1.98 billion. Debt was 54.7% of total capitalization, compared with 53.8% at year-end.
- Available committed credit was $324.4 million for Avista Corp. and $25.0 million for AEL&P. Avista had also drawn the full $100 million under a separate credit agreement due April 2021.
- Quarterly dividends declared were $0.405 per share; nine-month dividends were $1.215 per share.
Changes versus the prior comparable period
- Q3 revenue fell 3.9% and shareholder net income fell 4.2%. Management attributed lower earnings primarily to higher operating expenses, including bad debt, and reduced commercial and industrial loads related to COVID-19; lower power supply costs and rate increases partly offset the decline.
- Nine-month shareholder net income fell 51.6%, largely because 2019 included a $103 million Hydro One merger termination fee. 2020 also included a customer-refund accrual related to the remanded 2015 Washington rate cases, a Colstrip replacement-power disallowance accrual, higher operating costs and depreciation, and impairments/write-off of a note receivable in other businesses.
- Nine-month revenue declined 4.0%, reflecting lower electric and gas wholesale/optimization revenues and reduced electric loads, partly offset by rate increases and customer growth. Utility resource costs also declined.
- Operating cash flow was lower partly because 2019 included the Hydro One termination fee and 2020 included a $33.5 million cash settlement of interest-rate swaps.
Outlook, regulation, risks and unusual items
- Management expected 2020 operating cash flow to decline because of lower retail sales and customer payments, but said cash flow, credit facilities and 2020 debt and equity issuance should provide adequate resources for capital spending, dividends and other commitments over the next 12 months. The filing provides no specific earnings-per-share guidance.
- Management expected COVID-related bad debt expense to be an additional $3.5 million above its original forecast for the remainder of 2020. It reported $8.0 million of year-to-date incremental bad debt expense versus forecast and had deferred $2.5 million of Idaho costs, subject to regulatory review and recovery approval.
- Estimated 2020 capital expenditures increased from $405 million to $430 million, reflecting growth and storm-related capital. The company expected approximately $70 million of equity issuance for 2020, including $53.4 million issued through September.
- Washington’s 2019 rate-case order provided annual base-revenue increases of $28.5 million for electric and $8.0 million for gas, effective April 2020, while requiring return of about $40 million of ERM rebates over two years. In October 2020, Avista filed Washington rate cases requesting base-rate increases fully offset by customer tax credits. Idaho rate cases were expected in Q1 2021; an Oregon gas settlement sought a $4.4 million annual increase effective January 2021, pending commission approval.
- The WUTC ordered $8.5 million of refunds tied to the 2015 Washington rate cases; refunds began in April 2020. The company also recorded an approximately $3 million disallowance for replacement power during the 2018 Colstrip outage.
- The September 2020 windstorm caused outages and regional wildfires. Avista reported that the fires affected about 22,000 acres and approximately 230 structures; investigations were ongoing. The company said it had found no evidence of negligence or equipment deficiencies, but acknowledged potential claims and intends to defend them. Separately, litigation over the 2018 Boyds Fire sought up to $4.4 million plus private-party claims.
- Avista planned a ten-year wildfire-resiliency program estimated at $330 million and sought regulatory deferral/recovery. Other material exposures include Colstrip environmental remediation, regulatory recovery of deferred costs, customer credit and collections, derivative collateral demands, and the effects of climate and emissions regulation.
- In September, Avista issued $165 million of 3.07% first mortgage bonds due 2050. It paid $33.5 million to settle interest-rate swaps associated with the issuance; the cost is to be amortized over the debt’s life. The company reported compliance with financing covenants.
Key facts for investors to verify
- Whether regulators approve recovery of COVID-19 deferrals, wildfire-plan costs and requested rate increases, and the timing of any recovery.
- Potential liability, insurance coverage and financial impact from the 2020 windstorm wildfires and the Boyds Fire litigation.
- Customer payment trends, bad debt expense and operating cash flow as pandemic effects continue.
- Funding and refinancing needs, particularly the $100 million credit agreement maturing in April 2021, planned capital expenditures and pension contributions.
- How much of the nine-month earnings decline reflects recurring operations versus the prior-year Hydro One termination fee and other unusual or regulatory items.