AVISTA CORP quarterly report, Q3 FY2021

Avista Corporation — Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2021. Avista is primarily a regulated electric and natural gas utility serving the Pacific Northwest and Alaska. Interim financial statements are unaudited; the independent accountant conducted a review, not an audit.

Financial performance

Metric	Q3 2021	Q3 2020	9M 2021	9M 2020
Operating revenue	$296.0 million	$272.6 million	$1,007.1 million	$941.5 million
Income from operations	$24.2 million	$28.5 million	$157.9 million	$145.6 million
Net income	$14.4 million	$4.9 million	$96.5 million	$70.8 million
Diluted EPS	$0.20	$0.07	$1.38	$1.04

• Q3 operating expenses rose to $271.8 million from $244.1 million, with higher resource costs; operating income declined despite higher revenue. Q3 included $10.3 million of net other income versus $2.2 million a year earlier, primarily reflecting investment gains, and a $5.4 million income tax benefit.
• For the first nine months, revenue growth reflected rate increases, customer growth and higher non-decoupled usage. Net income also benefited from investment gains and the Spokane Steam Plant asset sale; higher power supply costs partly offset these gains.
• Avista Utilities’ total utility margin was $185.6 million in Q3, essentially flat with $185.7 million in Q3 2020. Nine-month utility margin increased to $649.7 million from $634.6 million. These are non-GAAP measures; the filing defines utility margin as operating revenues less resource costs.
• Hot, dry 2021 conditions increased customer loads while reducing hydro generation, requiring more purchased power and thermal generation. The company recorded a $7.1 million pretax expense under Washington’s Energy Recovery Mechanism (ERM) for the first nine months, versus a $5.9 million benefit in 2020.

Cash flow, debt and liquidity

• Cash from operations for the first nine months was $228.9 million, down from $282.5 million. Utility capital expenditures were $322.8 million, compared with $297.8 million; net cash used in investing was $326.9 million.
• Cash and cash equivalents were $19.2 million at September 30, 2021, versus $14.2 million at year-end 2020.
• Total debt, including current debt and leases, was $2.52 billion; shareholders’ equity was $2.10 billion. Debt represented 54.5% of the company’s reported debt-plus-equity capital structure, compared with 54.0% at year-end 2020.
• Current liabilities rose to $799.2 million from $505.9 million, including $250 million of current long-term debt. Long-term debt was $1.90 billion. The company had $269 million drawn on its $400 million credit line and reported $105.4 million of available Avista Corp. credit-line liquidity, plus AEL&P’s undrawn $25 million facility. Management said liquidity was adequate for the next 12 months.
• Avista issued $70 million of 2.90% first mortgage bonds due 2051 in September and expected to issue another $70 million in December 2021, with proceeds intended to repay credit-line borrowings. It also issued $61.3 million of common stock in the first nine months. Dividends paid were $88.2 million; dividends declared were $1.2675 per share for the nine-month period.

Outlook, regulatory developments and risks

• Management projected Avista Utilities capital expenditures of about $450 million in 2021 and $445 million annually in 2022 and 2023. It expected 2021 funding of approximately $140 million in long-term debt and $90 million in common stock; for 2022, approximately $370 million in long-term debt and $90 million in common stock to refinance $250 million of maturities and fund investment.
• Washington regulators approved 2020 electric and natural gas rate cases effective October 1, 2021, with designed annual base-revenue increases of $13.6 million and $8.1 million, respectively. Tax benefits offset the increases in billed rates at that time. Idaho approved a two-year rate settlement, with electric increases and natural gas adjustments partly offset by customer tax credits. Avista expected to file multi-year Washington rate cases in Q1 2022.
• The company’s 2021 resource plan forecasts adequate resources through October 2026, followed by a projected capacity deficit of 247 MW by January 2027, net of energy efficiency. It identifies new resources, including renewables, storage and demand response; natural-gas peaking units were described as the lowest-cost option in the plan for the projected shortfall. The plan assumes Colstrip exits the portfolio, but no exit strategy had been developed.
• Key uncertainties include hot/dry weather and hydro availability, wholesale energy prices, regulatory cost recovery, COVID-19 and potential workforce effects of vaccine requirements, cyber threats, and environmental and clean-energy mandates. More than 90% of utility revenue was covered by regulatory mechanisms, which management said mitigate load and revenue fluctuations.
• Wildfire matters remain significant. The company disputes allegations concerning the 2018 Boyds Fire, for which Washington DNR sought up to $4.4 million, as well as claims relating to 2020 windstorm fires. The DNR attributed the Babb Road Fire to a branch falling on an Avista line; Avista disputes negligence, and no material Babb Road claims had been asserted as of the filing. The company estimated about 230 structures were affected by the 2020 fires.
• Colstrip co-owner disputes and related litigation concern arbitration, unit operations and Montana legislation; the company said it could not predict the outcome or potential financial impact. The Washington rate case disallowed $2.5 million of SmartBurn costs, which Avista wrote off in Q3. The U.S. Department of Justice indicated a potential claim of about $2 million, possibly up to $6 million with treble damages, related to a 2017 National Park Service incident; Avista disputes the claim.
• After quarter-end, an October 28, 2021 natural-gas incident in Rathdrum, Idaho, following third-party excavation damage, destroyed one residence and caused minor injuries. Avista said the likelihood and amount of any claim were not yet predictable.

Most important facts for investors to verify

• Whether higher power and fuel costs persist and how much is ultimately recovered through ERM, PCA, PGA and rate proceedings.
• Actual funding, refinancing and capital-spending outcomes versus management’s 2021–2023 plans, and the resulting debt and equity issuance.
• Regulatory decisions and customer-rate impacts from Washington and Idaho rate plans, clean-energy requirements and wildfire-cost recovery.
• Developments, claims and potential exposure from wildfire litigation, Colstrip disputes, the National Park Service matter and the Rathdrum incident.
• How much nine-month earnings growth depends on investment gains, tax-method changes and other items that may not recur.