Avista Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period is Q1 2018. Avista is primarily a regulated electric and natural gas utility serving the Pacific Northwest and Alaska, with smaller non-utility businesses. Interim financial statements are unaudited; the independent accountant’s review identified no material modifications needed.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Operating revenue | $396.5 million | $409.4 million |
| Income from operations | $67.1 million | $94.2 million |
| Net income attributable to Avista shareholders | $115.8 million | $54.9 million |
| Diluted EPS | $1.76 | $0.83 |
| Cash from operating activities | $196.9 million | $184.8 million |
| Utility capital expenditures | $93.6 million | $81.8 million |
| Cash dividends paid | $25.6 million | $24.6 million |
Shareholder earnings rose sharply, principally because Avista received a $103 million Hydro One termination fee. The fee was partly offset by $19.7 million of Q1 2019 transaction costs and related taxes; management said total transaction costs incurred over 2017–2019, including taxes, were approximately $51 million. The fee is unusual and should not be treated as recurring earnings.
Revenue declined 3.1% year over year. Reported operating income fell despite higher net income, reflecting the termination fee being presented below operating income and higher transaction costs and operating expenses. Avista Utilities’ disclosed utility margin, a non-GAAP measure, was $239.0 million versus $237.1 million: electric margin declined $1.0 million while natural gas margin increased $2.9 million. Net power supply costs were pressured by lower hydro generation and higher purchased-power and natural-gas fuel prices.
Liquidity and debt at March 31, 2019: Cash was $14.9 million; current assets were $364.8 million and current liabilities $566.6 million. Total debt, including current debt and affiliated-trust debt, was $2.0 billion, or 51.4% of capitalization. Short-term borrowings were $119.0 million, down from $190.0 million at year-end. Avista reported $220.9 million available on its $400 million credit facility and $25 million available to AEL&P; management considered liquidity adequate for the next 12 months. The company planned approximately $165 million of long-term debt issuance and up to $50 million of equity during 2019.
Operating cash flow increased $12.1 million year over year, with the termination fee a principal factor. Power and natural-gas cost deferrals reduced Q1 2019 operating cash flow by $48.1 million. Cash used in investing was $97.7 million and cash used in financing was $98.0 million.
Material changes and business developments
- Hydro One’s proposed acquisition was terminated by mutual agreement in January 2019 after Washington and Idaho regulators denied approval. Avista received the $103 million termination fee. Previously agreed transaction-related customer commitments no longer apply; acquisition costs are not being passed to customers.
- Q1 revenue and earnings also reflected weather and operating differences: cooler weather supported Avista Utilities retail volumes, while warmer weather and lower retail rates reduced AEL&P revenue. AEL&P net income was $3.6 million, down from $3.8 million. Other businesses earned $0.3 million versus a $4.4 million loss, partly because Q1 2018 included an investment impairment and renovation costs.
- Avista adopted the new lease standard on January 1, 2019, recognizing operating-lease right-of-use assets and liabilities. At quarter-end these were $70.8 million and $71.8 million, respectively; finance-lease liabilities were $56.5 million.
- Avista agreed to sell METALfx; the sale closed April 18, 2019. The company estimated net proceeds of $16.6 million and an after-tax gain of $2.4 million. The business was classified as held for sale at quarter-end.
Outlook, regulatory matters and risks
- Management expected a 2019 effective tax rate of approximately 16%–17%. It cited regulatory lag expected during 2019–2021, partly related to delayed rate filings and continued utility investment.
- Washington electric and natural-gas rate cases filed April 30, 2019 seek staged annual revenue increases effective April 2020 and April 2021; requested increases are $45.8 million and $18.9 million for electric service, and $12.9 million and $6.5 million for natural gas. These are proposals subject to regulatory review, not approved rates. Oregon’s March 2019 natural-gas case seeks a 7.8% base-rate increase; Idaho filings were expected in Q2 2019.
- Washington’s review of the 2015 rate cases followed a court ruling against including an attrition allowance in rate base. The amount, if any, to be returned to customers is unresolved and not estimable by the company.
- Avista signed an agreement to join the CAISO Energy Imbalance Market, targeting full participation by April 2022. It estimated implementation costs of approximately $25 million over three years and annual benefits of approximately $6 million, and expects to seek recovery of net costs through regulation.
- Avista announced a goal of 100% clean electricity by 2045 and carbon-neutral electricity supply by the end of 2027. Washington clean-energy legislation was awaiting final approval as described in the filing; Avista said it expected it likely to become law and intended to seek recovery of associated costs.
- Other matters to monitor include the Oregon challenge to regulators’ authority to defer capital-investment costs, the Colstrip coal supply contract beyond 2019, and collateral exposure tied to commodity and interest-rate derivatives. A credit downgrade below investment grade could trigger additional collateral demands; the filing estimates up to $8.5 million for energy derivatives without contractual thresholds and up to $2.3 million for interest-rate swaps under specified assumptions.
Most important facts for investors to verify
- Separate recurring utility performance from the $103 million termination fee, $19.7 million Q1 transaction costs, and related tax effects when assessing earnings quality.
- Track outcomes and timing of Washington, Oregon and expected Idaho rate cases, including the unresolved 2015 Washington attrition allowance proceeding.
- Confirm planned 2019 financing, capital spending, dividend capacity, and continued compliance with credit-facility covenants.
- Monitor execution costs and regulatory recovery for the CAISO market entry, and the status and cost implications of clean-energy requirements and Colstrip fuel arrangements.
- Review derivative collateral requirements and the final proceeds and gain from the METALfx sale; the sale closed after quarter-end.