Avista Corporation — Q1 2015 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2015. Avista is primarily a regulated electric and natural gas utility operating in the Pacific Northwest, with Alaska Electric Light and Power (AEL&P) acquired July 1, 2014. Results are not fully comparable with Q1 2014: AEL&P is included in 2015 but not 2014, while Ecova, sold June 30, 2014, is reported as discontinued operations in the prior-year period.
Financial performance and position
- Revenue: $446.5 million, essentially unchanged from $446.6 million. Utility revenue was $436.4 million versus $437.1 million.
- Profit: Net income attributable to Avista shareholders was $46.4 million, down from $48.5 million. Diluted EPS was $0.74 versus $0.81; continuing-operations diluted EPS was also $0.74 versus $0.79.
- Margins and operating results: Income from continuing operations was $89.6 million versus $90.3 million. Avista Utilities’ gross margin, a non-GAAP measure, was $217.4 million versus $217.1 million.
- Cash flow and investment: Operating cash flow was $146.8 million versus $156.9 million. Utility capital expenditures were $81.6 million versus $59.7 million. Cash and cash equivalents were $22.1 million at quarter-end.
- Debt and liquidity: Total debt was $1.615 billion, or 51.7% of total capitalization, versus $1.656 billion and 52.8% at year-end. Avista had $299.4 million available under its $400 million revolver after $65.0 million of borrowings and $35.6 million of letters of credit. The company reported compliance with its debt covenants.
- Shareholder returns: The declared quarterly dividend rose 4% to $0.33 per share. Avista repurchased 89,400 shares for $2.9 million during the quarter.
Changes versus the prior comparable period
- Management attributed the decrease in earnings mainly to unusually warm winter weather, which reduced heating demand. Washington decoupling, rate increases, lower power-supply costs, and a lower Idaho earnings-sharing provision partly offset the impact.
- Avista Utilities’ electric gross margin increased $3.5 million, while natural gas gross margin declined $3.2 million. Washington decoupling deferrals benefited electric and natural gas revenues by $3.9 million and $2.7 million, respectively.
- Operating expenses increased, including higher depreciation and amortization, pension costs, and property taxes. First-quarter 2014 also included $1.5 million of net income from discontinued operations related to Ecova.
- Operating cash flow declined, while utility capital expenditures rose. Cash flow benefited from income-tax-related working-capital movements, including $37.1 million of net cash received for income taxes.
Outlook, commentary, risks and unusual items
- Capital plans: Management expects Avista Utilities capital expenditures of about $375 million in 2015 and $350 million annually in 2016–2017; AEL&P spending is expected to be about $15 million annually in 2015–2017. Avista expected to issue up to $125 million of long-term debt in 2015. The filing does not provide a clear full-year earnings or EPS forecast.
- Regulation: Washington rate increases took effect January 1, 2015, and new electric and natural-gas decoupling mechanisms began. A May 2015 partial settlement in Washington reduced the company’s originally requested base revenue increases; it remained subject to regulatory consideration. An Oregon natural-gas settlement was approved in April 2015, and Avista filed a further Oregon rate request in May. Idaho rate cases were planned for the second quarter of 2015.
- Contingencies: The Sierra Club/MEIC Colstrip Clean Air Act litigation could result in a loss, but management could not predict the outcome or determine whether the impact would be material. The company had not recorded significant amounts for unresolved contingencies. Other matters include the Pacific Northwest refund proceeding, Colstrip coal-ash compliance, fish-passage and environmental obligations, and remediation of a diesel spill; management did not expect the spill to have a material financial effect.
- Market and liquidity risks: Commodity-price volatility, weather and hydroelectric availability, regulatory cost recovery, interest rates, counterparty credit, and collateral calls could affect results or cash needs. Below-investment-grade ratings could trigger additional collateral requirements. At March 31, the company reported potential additional collateral needs under specified downgrade scenarios, including $31.7 million for interest-rate swaps.
- Operational item: The new customer-information and work-management systems went live in February 2015. Avista reported delayed customer collections during the transition and said it would continue monitoring related controls.
- Ecova sale: The sale was expected to provide Avista approximately $143.5 million of net cash proceeds and a $69.7 million net gain, largely recognized in 2014. Escrow releases and working-capital adjustments remained relevant.
Important facts for investors to verify
- Track the effects of weather and the Washington decoupling mechanism on utility margins and customer balances.
- Confirm outcomes and timing of pending rate cases, including the Washington partial settlement and Idaho filings.
- Monitor execution of the capital program, planned debt issuance, leverage, and available revolver capacity.
- Assess customer collection performance and financial-control effectiveness following the new systems implementation.
- Follow Colstrip litigation and coal-ash compliance developments, potential collateral demands, and Ecova escrow recoveries.