Avista Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Avista is primarily a regulated electric and natural gas utility in the Pacific Northwest, with Alaska utility operations acquired July 1, 2014. Interim statements are unaudited and were reviewed by Deloitte; the review was not an audit.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenues | $337.3 million | $312.6 million | $783.8 million | $759.2 million |
| Income from continuing operations | $25.1 million | $31.3 million | $71.5 million | $78.7 million |
| Diluted EPS, continuing operations | $0.40 | $0.52 | $1.14 | $1.31 |
| Net income attributable to Avista shareholders | $25.2 million | $100.9 million | $71.7 million | $149.4 million |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $232.1 million | $224.0 million |
- Revenue increased 7.9% in Q2 and 3.2% for the half year. Continuing income fell 19.8% and 9.1%, respectively; diluted continuing-operations EPS declined accordingly.
- Prior-year reported net income included Ecova sale gains: 2014 discontinued-operations income attributable to Avista was $69.6 million for Q2 and $70.6 million for the first half. Ecova was sold June 30, 2014; its results make headline net-income comparisons non-comparable.
- Avista Utilities’ gross margin, a non-GAAP measure, rose to $182.8 million from $174.6 million in Q2 and to $400.2 million from $391.7 million for the half year. Higher utility operating costs, depreciation, taxes, and pension costs offset margin improvement.
- Six-month utility capital expenditures were $177.8 million; operating cash flow less utility capital expenditures was approximately $54.4 million. Cash declined to $16.2 million from $22.1 million at year-end.
- At June 30, total debt was approximately $1.64 billion and debt was 52.0% of total capitalization. Shareholders’ equity was $1.51 billion. Avista had $90.0 million drawn on its $400 million revolver and $34.4 million in letters of credit, leaving $275.6 million available; it reported compliance with debt covenants.
Material changes and management commentary
- Weather was a significant earnings factor: unusually warm first-quarter conditions reduced heating demand, partly offset by stronger second-quarter cooling loads. Washington decoupling mechanisms partially mitigated usage effects.
- Q2 utility gross margin benefited from Washington rate increases and warmer-weather electric loads, but was affected by lower hydro generation and timing of Washington power-cost recovery. First-half margin benefited from lower net power supply costs and rate increases.
- AEL&P contributed $0.9 million of net income in Q2 and $3.6 million in the first half; the prior-year comparable periods did not include its results.
- Cash dividends declared were $0.33 per share in Q2 and $0.66 per share for the first half. The company repurchased 89,400 shares for $2.9 million under a program that ended March 31.
Outlook, regulatory matters, and risks
- Management expected 2015 long-term debt issuance of up to $125 million and stated operating cash flows and committed credit facilities should provide adequate funding for planned expenditures, dividends, and commitments.
- Expected capital expenditures: Avista Utilities approximately $375 million in 2015 and $350 million annually in 2016–2017; AEL&P approximately $15 million annually in 2015–2017.
- Washington rate cases were pending. A partial settlement proposed a 7.29% return on rate base and reduced the requested electric revenue increase to $17.0 million (3.4%) and natural gas increase to $11.3 million (6.6%). UTC staff recommended disallowing $12.7 million of Washington Project Compass costs; management considered disallowance less than probable and intended to defend recovery.
- Idaho rate cases filed in June requested staged electric and natural-gas increases for 2016 and 2017. Oregon approved a 2015 natural-gas rate settlement; AEL&P did not expect to file a rate case in 2015.
- The new EPA coal-combustion-residuals rule led Avista to record an $11.7 million increase in asset-retirement obligations tied to its 15% interest in Colstrip Units 3 and 4. Future compliance and infrastructure costs were uncertain and could be material; the company expected to seek recovery through rates.
- Other notable exposures include the Sierra Club/MEIC Clean Air Act litigation concerning Colstrip, with a liability trial set for November 2015 and loss considered reasonably possible but not estimable; and Seattle’s request for rehearing in the Pacific Northwest refund proceeding after FERC denied its claims. Management did not expect the latter to materially affect results.
- Commodity-price and interest-rate volatility can create collateral demands. At June 30, the company had posted $28.0 million cash and $20.0 million letters of credit for energy derivatives, plus $22.4 million cash and $7.2 million letters of credit for interest-rate swaps. A credit downgrade below investment grade could trigger additional collateral requirements.
- Other risks include regulatory cost recovery, weather and hydro conditions, wholesale-market and counterparty exposure, environmental requirements, pension costs, and potential disruption or collection delays associated with the customer information and work-management systems placed in service in February 2015.
Important facts for investors to verify
- Track continuing-operations earnings separately from prior-year Ecova sale gains and account for AEL&P’s inclusion only after its July 2014 acquisition.
- Monitor outcomes of Washington, Idaho, and Oregon rate proceedings, including Project Compass cost recovery and the resulting approved returns and rates.
- Assess the eventual Colstrip coal-ash compliance plan, retirement and operating costs, and regulatory recovery; the initial $11.7 million obligation is subject to revision.
- Review capital-spending and financing needs against operating cash generation, available revolver capacity, debt maturities, and collateral requirements.
- Follow the Colstrip litigation and Seattle rehearing, as well as system-transition effects on customer collections and financial controls.