Avista Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; unaudited interim results. Avista is primarily a regulated electric and natural gas utility in the Pacific Northwest, with Alaska utility and other businesses. Comparisons are with Q1 2022 unless noted. Dollar amounts below are in millions except per-share data.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Operating revenue | $474.6 | $462.0 | +2.7% |
| Income from operations | $76.6 | $83.0 | -7.7% |
| Net income | $54.8 | $71.6 | -23.4% |
| Diluted EPS | $0.73 | $0.99 | -$0.26 |
| Cash from operating activities | $94.2 | $161.9 | -$67.6 |
- Operating margin, calculated as operating income divided by revenue, was approximately 16.1%, versus 18.0% a year earlier. Net margin was approximately 11.6%, versus 15.5%.
- Avista Utilities’ reported non-GAAP utility margin was $268.0 million, up from $262.4 million. Electric utility margin was $172.6 million versus $172.9 million; natural gas utility margin was $95.5 million versus $89.6 million.
- Utility capital expenditures were $100.5 million. Operating cash flow less utility capital expenditures was approximately negative $6.2 million; this simple calculation is not a company-reported free-cash-flow measure.
- Cash and cash equivalents were $10.6 million at March 31, 2023, versus $13.4 million at December 31, 2022. Total assets were $7.394 billion and shareholders’ equity was $2.385 billion.
- Total debt, including short-term borrowings, current debt and leases, was $2.941 billion, or 55.2% of total capitalization, versus $2.923 billion and 55.6% at year-end. Short-term borrowings were $231 million, down from $463 million; long-term debt was $2.530 billion.
- Avista issued $250 million of 5.66% first mortgage bonds due 2053. The company reported $290.4 million of available liquidity across its credit and letter-of-credit facilities, plus an undrawn $25 million AEL&P credit line.
Material changes and management commentary
- Lower earnings primarily reflected higher operating costs and interest expense, a smaller income tax benefit, and weaker electric utility results under Washington’s Energy Recovery Mechanism. Q1 2023 included a $7.6 million pre-tax ERM expense, compared with a $1.9 million benefit in Q1 2022.
- Higher natural gas retail revenues, reflecting rate increases and colder-weather usage, helped lift natural gas utility margin. Management noted increased customer growth and the effects of general rate cases as partial offsets to cost pressures.
- Winter commodity prices and pipeline constraints increased cash needs for energy purchases and derivative collateral. Net deferred natural gas costs were $93.1 million at quarter-end, up from $52.1 million at year-end; deferred power-cost assets also increased. Management expects recovery through customer rates, subject to regulatory processes.
- Interest expense rose to $35.1 million from $28.1 million, amid higher rates and borrowing needs. Inflation, particularly in labor, benefits, fuel and other operating costs, and supply-chain delays remain pressures.
Outlook, regulation and risks
- Management expects adequate liquidity for the next 12 months, plans to increase its $400 million committed line to $500 million in Q2 2023, and expects approximately $120 million of common-stock issuance in 2023, including $29.9 million already issued. It said it does not expect further long-term debt issuance in 2023.
- Avista Utilities expects capital expenditures of approximately $475 million annually in 2023–2025. The company expects pension contributions of $10 million in 2023.
- Washington approved rate increases effective December 2022 and December 2023. Idaho electric and gas rate increases were proposed for September 2023 and September 2024; an Oregon gas increase was proposed for January 2024. These Idaho and Oregon requests remained subject to regulatory review. AEL&P also has a proposed permanent rate increase pending in Alaska.
- Avista agreed to transfer its 15% ownership in Colstrip Units 3 and 4 to NorthWestern, scheduled for December 31, 2025, with no monetary exchange. Avista expects no material financial impact, but remains responsible for specified costs through closing and certain existing site-remediation obligations.
- Washington’s Climate Commitment Act took effect January 1, 2023. The company had not accrued a potential additional $5.9 million Q1 cost for wholesale-electric allowances because the requirement was uncertain and not considered probable; it expects to seek recovery of applicable costs through ratemaking.
- Material uncertainties include wildfire litigation and claims, including the Babb Road fire, the Boyds fire and other windstorm-related fires; other lawsuits and contingencies; commodity-price and collateral demands; regulatory recovery and rate-case outcomes; climate and severe-weather impacts; and the Colstrip transaction and coal-supply conditions. The company said it could not predict outcomes or estimate potential losses for several fire matters.
- The independent accountant’s interim review found no material modifications needed for GAAP conformity; it was a review, not an audit. Management reported disclosure controls were effective at a reasonable-assurance level and no material Q1 change in internal control over financial reporting.
Important facts for investors to verify
- Whether regulators approve proposed rate increases and permit timely recovery of deferred commodity, CCA and other costs.
- How elevated interest rates, capital spending and commodity-related collateral requirements affect borrowing costs and liquidity.
- The status, potential exposure and insurance or regulatory recovery relating to wildfire and other legal claims.
- Whether the Colstrip transfer closes on its planned timetable and the final allocation of remediation and operating costs.
- Actual 2023 equity issuance, credit-line expansion, capital spending and pension contributions compared with management’s plans.