Avista Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; interim financial statements are unaudited. Avista is principally a regulated electric and natural-gas utility serving the Pacific Northwest, with Alaska utility operations and other businesses.
Financial results and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $300.8 million | $319.3 million | $697.3 million | $728.7 million |
| Income from operations | $39.8 million | $53.3 million | $106.8 million | $147.5 million |
| Net income attributable to Avista shareholders | $25.3 million | $25.6 million | $141.1 million | $80.5 million |
| Diluted earnings per share | $0.38 | $0.39 | $2.14 | $1.22 |
- Margins: Avista Utilities’ non-GAAP utility margin was $201.3 million in Q2, versus $199.2 million, and $440.3 million for the first six months, versus $436.3 million. The filing defines utility margin as operating revenue less resource costs; it is not a GAAP measure.
- Cash flow: Operating activities provided $252.7 million in the first half, compared with $275.4 million. Investing used $190.0 million, including $200.0 million of utility capital expenditures; financing used $60.1 million. Cash and equivalents were $17.2 million at June 30.
- Debt and liquidity: Total debt, including lease obligations and short-term borrowings, was $2.16 billion; debt represented 53.4% of total debt and shareholders’ equity. Short-term borrowings were $169.0 million. Avista reported $212.4 million available on its $400 million credit line and $25 million available to AEL&P; it stated liquidity was adequate for the next 12 months. The main facility expires April 2021; AEL&P’s facility expires November 2019.
- Balance sheet: Total assets were $5.88 billion and shareholders’ equity was $1.88 billion at June 30, 2019. The company paid $51.2 million in dividends in the first half; dividends declared were $0.775 per share.
Changes versus prior period and significant items
- First-half net income rose to $141.1 million from $80.5 million, but included a nonrecurring $103 million Hydro One termination fee received in January. Avista said 2019 transaction costs were $19.7 million pre-tax; the remaining fee after costs and taxes supported general corporate purposes and reduced external financing needs. Q2 shareholder net income was slightly lower year over year.
- METALfx was sold in April. The sale generated a reported expected after-tax gain of $2.3 million and $16.4 million in net cash proceeds received during the first half, after cash sold and escrow amounts.
- Revenue declined year over year in both the quarter and first half. Management cited lower wholesale electric sales and fuel-sale revenue, lower retail rates in part from tax and decoupling adjustments, and reduced AEL&P sales associated with warmer-than-normal weather. Customer growth and general rate increases partly offset these factors.
- Operating income declined despite lower resource costs. Higher utility operating and maintenance expense, depreciation and amortization contributed; Q2 also included a $7 million community donation commitment. A one-time Colstrip accelerated-depreciation charge in Q2 was offset by an income-tax benefit.
- Cash from operations decreased, mainly reflecting power and natural-gas cost deferrals and working-capital movements, partly offset by the Hydro One fee. Utility capital expenditures increased from $183.1 million in first-half 2018 to $200.0 million in first-half 2019.
Outlook, regulation and risks
- Management expects a 2019 effective tax rate of approximately 16%–17%. It estimated 2019 Avista Utilities capital expenditures of approximately $435 million, up from its prior $405 million estimate, primarily due to renewable integration and customer growth. It expected to issue approximately $180 million of long-term debt and up to $65 million of equity during 2019, including year-to-date issuances.
- Washington electric and natural-gas rate cases filed in April seek staged increases effective April 2020 and April 2021. An Idaho electric rate request filed in June seeks a $5.3 million annual base-revenue increase. Oregon parties reached a settlement-in-principle on the natural-gas case after quarter-end. Outcomes remain subject to regulatory approval; management cited regulatory lag as a concern.
- Avista expects to be in a benefit position under Washington’s Energy Recovery Mechanism for 2019, within the 75% customer/25% company sharing band. A proposed refund was consolidated with the Washington rate cases for consideration.
- Avista announced goals of carbon-neutral electricity supply by the end of 2027 and 100% clean electricity by 2045. Washington’s 2019 clean-energy law requires utilities to stop allocating coal-fired resources to Washington retail customers by the end of 2025 and sets later clean-energy targets. Compliance costs, Colstrip effects and cost recovery remain uncertain. The Colstrip coal supply contract remained in effect through 2019; negotiations and alternative sourcing were ongoing.
- Avista signed an agreement to join the California ISO Energy Imbalance Market, targeting full participation by April 2022. It estimated implementation costs of about $25 million over three years and annual benefits of about $6 million, with net costs expected to be pursued through regulation.
- Risks include regulatory decisions and possible customer refunds, weather and hydroelectric conditions, commodity prices and collateral needs, financing costs, wildfire and other operational events, environmental requirements, and litigation. The company could not estimate any potential refund in the remanded 2015 Washington rate-case matter. It also cited uncertainty in Oregon regarding deferral of capital-investment costs.
Important facts for investors to verify
- How much of first-half earnings and cash generation reflects the one-time Hydro One termination fee, METALfx sale and other nonrecurring items?
- What are the final outcomes and effective dates of the pending Washington, Idaho and Oregon rate cases, including the ERM refund and any exposure from the 2015 Washington rate-case remand?
- Can planned capital spending, debt and equity issuance, and dividend commitments be funded while maintaining credit-facility covenant compliance and adequate liquidity?
- What will be the eventual cost and recoverability of clean-energy requirements, Colstrip-related obligations, and EIM implementation?
- How do lease accounting changes, commodity-price movements, derivative collateral calls and weather-sensitive operating results affect reported earnings and cash flows?