Avista Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Avista operates regulated electric and natural-gas utilities and owns Ecova, an energy-efficiency and facility-cost-management business. Financial statements are unaudited; the independent accountant performed an interim review, not an audit.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Operating revenue | $491.0 million | $482.9 million |
| Income from operations | $93.1 million | $85.1 million |
| Net income attributable to Avista shareholders | $48.5 million | $42.3 million |
| Diluted EPS | $0.81 | $0.71 |
| Operating cash flow | $156.9 million | $105.4 million |
| Utility gross margin | $217.1 million | $201.9 million |
Utility gross margin is a company-defined non-GAAP measure. Utility electric gross margin was $152.6 million, up from $142.7 million; natural-gas gross margin was $64.5 million, up from $59.3 million. Q1 2014 dividends declared were $0.3175 per share, versus $0.305.
Liquidity, debt and investment
- Cash and cash equivalents were $90.2 million at March 31, compared with $82.6 million at year-end 2013. Current assets of $504.4 million were below current liabilities of $570.2 million.
- Total debt was $1.491 billion, or 52.8% of debt plus Avista shareholders’ equity, down from $1.559 billion and 54.6% at December 31. The credit agreement’s maximum debt-to-capitalization ratio is 65%; Avista reported compliance.
- Avista had a $400 million committed facility, with $111.0 million drawn and $9.6 million of letters of credit outstanding, leaving $279.4 million available. Ecova had $42.0 million drawn on its $125 million facility.
- Utility capital expenditures were $59.7 million in the quarter. Management forecast utility capital expenditures of about $335 million in 2014, $355 million in 2015 and $350 million in 2016.
Changes and management commentary
- Shareholder net income increased $6.2 million year over year. Management attributed the improvement chiefly to utility rate increases and colder weather, partly offset by higher operating costs, depreciation and taxes.
- Utility revenue increased $6.0 million; utility resource costs fell $9.1 million. Colder weather lifted retail electric and gas demand. Ecova revenue rose $2.0 million, but its shareholder-attributable earnings edged down to $1.1 million from $1.2 million because of higher costs and depreciation.
- Operating cash flow rose $51.5 million. Investing used $60.7 million; financing used $88.6 million, including $60.0 million of net short-term borrowing repayments and $19.2 million of dividends paid.
- Management said expected operating cash flow, available credit and planned debt and equity issuance should fund capital spending, dividends and other commitments. It expected about $190 million of long-term debt issuance and approximately $145 million of stock issuance in 2014, principally related to the planned Alaska acquisition. A planned tax accounting-method change was expected to reduce 2014 tax payments by about $50 million.
Outlook, risks and unusual items
- Regulation and rates: Avista filed Washington electric and gas rate cases in February 2014, requesting annual revenue increases of $18.2 million and $12.1 million, respectively. The requests and proposed decoupling mechanisms remained subject to regulatory review. Oregon rate increases began in February, with a further adjustment scheduled for November 2014. Management was evaluating whether to file Idaho rate cases.
- Planned acquisition: Avista expected to acquire Alaska Energy and Resources Company for $170 million less its debt, primarily through Avista stock, subject to approvals and closing conditions; closing was expected by July 1, 2014. Management forecast slight EPS dilution in 2014 and slight accretion from 2015 onward, with estimated goodwill of $48 million.
- Ecova strategic review: Avista was exploring a possible sale of its 80.2% Ecova interest and had received offers, but stated there was no assurance a transaction would be completed.
- Legacy energy-market matters: Avista and other parties filed a settlement at FERC on March 7 covering several California and Pacific Northwest proceedings. It would return $15 million of Avista Energy’s receivable, subject to FERC approval. Avista did not expect a material adverse effect. A separate Seattle proceeding had an initial decision denying claims against Avista; further briefing remained pending.
- Environmental and operating matters: A lawsuit by environmental groups over alleged Clean Air Act violations at the Colstrip plant remained unresolved, and Avista could not predict its outcome. A December 2013 underground diesel leak of approximately 10,000 gallons at Kettle Falls was being assessed for voluntary cleanup; the company reported no indication that groundwater or surface water was threatened and did not expect a material financial effect.
- Market and funding risks: Earnings and liquidity remain exposed to weather, hydroelectric output, wholesale power and gas prices, regulatory cost recovery, counterparty performance, credit ratings and collateral calls. Management estimated potential additional collateral needs of up to $18.6 million if Avista fell below investment grade under the analysis including contractual thresholds.
- Pensions and policy: Avista contributed $11 million to its pension plan in Q1 and expected $32 million of contributions for 2014. It revised pension and retiree-health benefits for certain new hires. Potential carbon regulations and Washington and Oregon policy developments could affect generation costs; impacts were not yet clear.
Important facts for investors to verify
- Progress, final terms, stock issuance and earnings impact of the Alaska Energy and Resources acquisition.
- Outcome of Washington rate cases, Idaho rate-filing decisions, and the timing and treatment of customer rebates and cost-recovery deferrals.
- Whether Ecova is sold, and the financial implications of any proposed transaction.
- FERC approval and final settlement economics for the legacy energy-market proceedings, including recovery of the stated $15 million receivable.
- Colstrip litigation, Kettle Falls remediation costs, and any new environmental or carbon-policy requirements.
- Actual capital spending, planned financing, pension funding and the availability of liquidity if commodity prices or collateral requirements change.