Avista Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. Avista is primarily a regulated electric and natural gas utility serving the Pacific Northwest, with Alaska utility subsidiary AEL&P and smaller non-utility businesses.
Financial performance and position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Operating revenue | $1,396.9 million | $1,445.9 million | Down 3.4% |
| Operating income | $261.1 million | $292.2 million | Down 10.6% |
| Net income attributable to Avista shareholders | $136.4 million | $115.9 million | Up 17.7% |
| Diluted EPS | $2.07 | $1.79 | Up 15.6% |
| Operating cash flow | $361.9 million | $410.3 million | Down 11.8% |
| Utility capital expenditures | $424.4 million | $412.3 million | Up 2.9% |
| Total debt, including current debt and capital leases | $2,104.7 million | $1,926.2 million | Up 9.3% |
| Shareholders’ equity | $1,773.2 million | $1,729.8 million | Up 2.5% |
Cash and cash equivalents were $14.7 million at year-end. Avista had $199.5 million of available capacity on its $400 million committed credit facility; AEL&P had $25 million available on its separate facility. Avista’s debt-to-total-capitalization ratio was 54.3%, below its 65% credit-facility limit. The board declared $1.49 per common share in dividends for 2018, versus $1.43 in 2017.
Avista Utilities’ non-GAAP utility margin was $840.7 million, down from $859.2 million. Electric margin declined $13.6 million and natural gas margin declined $4.8 million. The company reported an effective tax rate of 16.0%, compared with 41.7% in 2017, primarily reflecting the federal tax-rate reduction and related regulatory amortization.
Changes and notable developments
- Lower utility revenue reflected warmer-than-prior-year heating weather, cooler cooling-season weather, customer tax refunds and rate reductions following the Tax Cuts and Jobs Act. Customer growth and rate increases partly offset these effects.
- Shareholder net income improved despite lower operating income, primarily because of lower acquisition-related costs and substantially lower income tax expense. Avista Utilities’ earnings increased to $134.9 million from $114.7 million; AEL&P earnings declined to $8.3 million from $9.1 million.
- Operating cash flow fell by $48.4 million, in part because the tax-law change reduced deferred-tax cash benefits and shifted the company into a federal income-tax payable position. Net cash used for investing was $440.4 million; financing provided $77.0 million.
- Moody’s downgraded Avista’s issuer rating from Baa1 to Baa2 in December 2018, citing tax-law effects on cash flow and uncertainty about Washington regulatory outcomes. The company remained investment grade.
- On January 23, 2019, Avista and Hydro One terminated their proposed acquisition after regulatory denials in Washington and Idaho. Hydro One paid a $103 million termination fee on January 24, 2019; approximately $51 million was expected to reimburse transaction costs and related taxes, with the balance available for general corporate purposes. This was a subsequent event, not 2018 operating revenue.
Outlook, risks and contingencies
- Management expected to file general rate cases in Washington, Idaho and Oregon during 2019, seeking rates effective in early 2020. It warned of regulatory lag through 2019–2021 from infrastructure investment not yet reflected in rates.
- For 2019, management expected approximately $165 million of long-term debt issuance and up to $50 million of equity issuance to refinance maturities, fund capital spending and maintain an appropriate capital structure. It forecast Avista Utilities capital expenditures of $405 million annually for 2019–2021 and AEL&P expenditures of $9 million in 2019.
- Management forecast average annual 2019–2022 customer growth of 1.0% for electricity and 1.4% for natural gas, with load growth of 0.5% and 1.1%, respectively. These are forecasts, not guarantees.
- Key exposures include weather and hydroelectric generation variability, wholesale energy prices and collateral calls, regulatory cost recovery, credit ratings and access to financing, cyber incidents, wildfire and severe-weather damage, and environmental requirements.
- Colstrip is a significant uncertainty: Avista owns 15% of Units 3 and 4, with a remaining investment of $122.4 million. Compliance costs, coal-supply issues, possible accelerated depreciation and future operating or closure decisions could affect costs and asset values. Potential environmental compliance costs were not clearly quantifiable in the filing.
- A Washington court remanded the 2015 rate cases after finding the rate-base attrition allowance unlawful; the amount, if any, to be removed from rates remained undetermined. A shareholder lawsuit related to the terminated acquisition also remained unresolved, and Avista could have indemnification obligations.
- Management expected adoption of the new lease standard in 2019 to add $65–$75 million of right-of-use assets and lease liabilities, excluding the existing $57.2 million Snettisham finance lease.
For the fourth quarter of 2018, shareholder net income was $45.8 million and diluted EPS was $0.70, compared with $27.6 million and $0.42, respectively, in fourth-quarter 2017. Quarterly results are seasonal and weather-sensitive.
Important facts for investors to verify
- Whether 2019 rate-case outcomes and timing sufficiently address regulatory lag and allow recovery of rising operating and capital costs.
- The company’s post-termination financing plan, actual use of the $103 million fee, debt maturities, equity issuance and credit-rating developments.
- Colstrip coal supply, environmental compliance and remediation estimates, depreciation assumptions, and any changes in its expected operating life.
- Actual cash flows and collateral requirements under energy and interest-rate derivatives, especially during commodity-price volatility or a credit downgrade.
- Potential financial effects of the Washington rate-case remand and the acquisition-related shareholder litigation.