Avista Corporation — Q1 2018 Form 10-Q
Business context and period. Avista is a regulated electric and natural gas utility operating mainly in the Pacific Northwest, with Alaska utility and other businesses. This unaudited filing covers the three months ended March 31, 2018, compared with Q1 2017. The interim financial statements received an independent accountant’s review, not an audit.
Key financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Operating revenue | $409.4 million | $436.5 million |
| Operating income | $94.2 million | $117.4 million |
| Net income attributable to Avista shareholders | $54.9 million | $62.1 million |
| Diluted EPS | $0.83 | $0.96 |
| Dividends declared per share | $0.3725 | $0.3575 |
| Cash provided by operating activities | $184.8 million | $149.7 million |
| Utility capital expenditures | $81.8 million | $86.8 million |
Operating margin was approximately 23.0% of revenue, down from 26.9%; net margin attributable to shareholders was approximately 13.4%, versus 14.2%. Lower reported revenue included customer tax refunds, which were offset by lower income tax expense and did not affect net income.
At March 31, 2018, cash was $26.3 million, current assets were $309.7 million and current liabilities were $669.7 million. Total debt, including current debt, capital leases, short-term borrowings and affiliated-trust debt, was $1.868 billion; shareholders’ equity was $1.758 billion. Debt was 51.5% of the company’s stated capital structure, down from 52.7% at year-end 2017. Avista had $314.6 million available on its $400 million credit facility; AEL&P had a separate $25 million facility with no borrowings outstanding.
Material changes and management commentary
- Shareholder-attributable net income fell $7.2 million year over year. Avista Utilities earnings declined to $55.5 million from $58.4 million; AEL&P was broadly stable at $3.8 million. Other businesses recorded a $4.4 million loss versus a $0.2 million loss, reflecting contractor insolvency-related costs, an equity-investment impairment and larger equity-investment losses.
- Avista Utilities’ gross margin declined $15.7 million, including $19.9 million of tax-related customer refund accruals. Excluding those refunds, electric and natural gas gross margins increased, principally from rate changes and customer growth. Warmer weather reduced retail electric and gas usage compared with Q1 2017.
- The effective tax rate fell to 16.3% from 34.9%, principally following the federal corporate tax rate reduction from 35% to 21%, with additional effects from deferred-tax amortization and equity-award tax benefits.
- Operating cash flow increased year over year, helped by lower derivative collateral postings and working-capital movements. Cash used in financing increased to $87.3 million from $42.1 million, including a $55.4 million reduction in short-term borrowings and higher dividends paid.
Outlook, significant matters and risks
- Hydro One transaction: The merger agreement provides for $53 cash per Avista share. Closing was expected in the second half of 2018, subject to outstanding approvals and conditions. Shareholder, FERC and HSR approvals had been obtained; several state and federal approvals remained pending as of the filing. A Washington settlement recommended approval and included customer and community commitments; total financial commitments across jurisdictions were estimated at approximately $74 million. Certain termination circumstances could require a $103 million fee from either party.
- Tax and rates: Avista recorded a $439.7 million net regulatory liability for excess deferred taxes and a $21.0 million customer refund liability for the difference between the tax rate in existing customer rates and the new federal rate. The company expects to return plant-related excess deferred taxes over decades through regulatory processes; much of the non-plant amount was expected to be returned within a year, subject to approvals.
- Capital and funding: Avista expected to issue approximately $375 million of long-term debt and up to $85 million of equity during 2018 for refinancing, investment and other corporate needs. Management expected available operating cash flow and credit facilities to fund near-term requirements, but warned that future operating cash flow could be reduced by tax-law changes, including loss of bonus depreciation and timing of customer refunds, potentially requiring additional capital.
- Operating outlook: Management expected a 2018 benefit under Washington’s ERM, citing above-normal hydro generation and lower natural gas fuel prices. Avista expected $22 million of pension contributions in 2018 and $110 million over 2018–2022.
- Risks and contingencies: Key exposures include regulatory cost recovery and approval of the Hydro One deal, weather and hydro conditions, commodity prices, financing costs, collateral requirements, and operational, environmental and cybersecurity events. A California market-related claim asserted potential exposure of up to $16 million; Avista disputed liability. A shareholder lawsuit concerning the Hydro One transaction remained stayed. The filing states no significant amounts were accrued for unresolved contingencies.
Important facts for investors to verify
- Progress and final outcomes of the remaining Hydro One regulatory approvals, settlement commitments and transaction closing conditions.
- Whether the $53-per-share merger consideration is realized, and any termination-fee exposure if the transaction fails.
- Timing and regulatory treatment of the $21.0 million customer refund liability and the $439.7 million excess deferred-tax regulatory liability.
- Execution of planned debt and equity issuance, liquidity needs, and the effect of tax changes on operating cash flow.
- Whether weather, generation, commodity costs and other-business losses develop in line with management’s expectations, and the outcome of the disclosed legal matters.