Avista Corporation — 2015 Form 10-K Summary
Business context and period: For the fiscal year ended December 31, 2015. Avista is primarily a regulated electric and natural gas utility serving the Pacific Northwest, with electric utility operations in Juneau, Alaska through AEL&P. Ecova was sold in 2014 and is reported as a discontinued operation. AEL&P was acquired on July 1, 2014, so its 2015 results include a full year versus six months in 2014.
Key financial results
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| Operating revenue | $1,484.8 million | $1,472.6 million | Up 0.8% |
| Income from operations | $253.2 million | $252.6 million | Up slightly |
| Continuing net income | $118.2 million | $119.9 million | Down 1.4% |
| Net income attributable to Avista shareholders | $123.2 million | $192.0 million | Down 35.8%; prior year included Ecova sale gains |
| Diluted EPS | $1.97 | $3.10 | Continuing-operations EPS was $1.89 versus $1.93 |
| Operating cash flow | $375.6 million | $267.3 million | Up $108.4 million |
| Utility property capital expenditures | $393.4 million | $325.5 million | Up $67.9 million; operating cash flow less utility capital expenditures was negative $17.8 million |
| Total debt | $1,729.8 million | $1,645.1 million | Debt was 53.1% of total capitalization, versus 52.6% |
| Shareholders’ equity | $1,528.6 million | $1,483.7 million | Up $45.0 million |
Revenue and income figures are consolidated. Utility gross margin, a non-GAAP measure used by management, increased by $16.5 million for electric operations and $9.2 million for natural gas operations. Management attributed the electric improvement primarily to Washington rate increases and lower net power supply costs; warmer-than-normal weather reduced heating demand.
Material changes and unusual items
- The decline in shareholder net income primarily reflects the 2014 Ecova disposition gain: the sale generated a $74.8 million net gain, nearly all recognized in 2014. Avista received $13.9 million of Ecova escrow proceeds in 2015.
- Avista Utilities’ shareholder earnings were essentially flat at $113.4 million, while AEL&P contributed $6.6 million in 2015, compared with $3.2 million for the second half of 2014.
- The November 2015 windstorm caused outages affecting about 180,000 customers. Restoration included $22.9 million of capital repair costs and $2.9 million of incremental utility operating and maintenance costs.
- Avista recorded a $12.5 million increase in its asset retirement obligation related to new coal-ash requirements at its 15% interest in Colstrip Units 3 and 4. Further compliance costs are uncertain and could be material.
- Pension expense increased to $27.1 million from $14.6 million in 2014. Pension plan assets returned a negative 0.8% in 2015, compared with a positive 11.6% in 2014.
Liquidity, debt, and capital plans
- Cash and cash equivalents were $10.5 million at year-end. Avista had $250.4 million available under its $400 million committed credit line; AEL&P had a separate $25 million line with no borrowings outstanding.
- Avista was in compliance with its credit-line debt-to-capitalization covenant, at 53.1% against a 65% maximum. Credit ratings were investment grade: BBB from S&P and Baa1 from Moody’s for issuer debt.
- In December 2015, Avista issued $100 million of 4.37% first mortgage bonds due 2045. Management expected to issue about $155 million of long-term debt and $55 million of common stock in 2016.
- Planned 2016–2018 capital expenditures were approximately $375–$405 million annually for Avista Utilities and $13–$18 million annually for AEL&P. Management said operating cash flow and available credit were expected to provide adequate resources for 2016 capital spending, dividends, and contractual commitments.
- Common dividends declared for 2015 totaled $1.32 per share. In February 2016, the board raised the quarterly dividend to $0.3425 per share, a 3.8% increase.
Outlook, regulation, and risks
- The 2015 electric integrated resource plan projected adequate resources through 2020 and a need for 565 MW of additional generation capacity during 2020–2034. Forecast load growth was about 0.6% over the 20-year planning horizon; the company said efficiency measures offset more than half of projected growth.
- For 2016–2019, Avista forecast average annual electric customer growth of 1.0%, electric load growth of 0.7%, natural gas customer growth of 1.1%, and natural gas load growth of 1.1%. These are forecasts, not earnings guidance.
- Washington rates effective January 11, 2016 included an $8.1 million annual electric base-revenue decrease and a $10.8 million natural gas increase. In February 2016, Avista filed a further Washington rate plan seeking staged increases beginning in 2017; these requests were pending and not guaranteed. Idaho rate settlements effective January 2016 provided smaller electric and natural gas increases.
- Major exposures include regulatory decisions on cost recovery and allowed returns; weather, hydroelectric generation and energy prices; pension funding; collateral demands and access to financing; cyber and operational disruptions; and environmental regulation. The company relies on regulatory mechanisms to defer or recover many power and gas costs, but recovery timing and approval remain subject to regulatory review.
- Colstrip faces environmental litigation and uncertain coal-ash compliance costs. The Clean Power Plan was stayed by the U.S. Supreme Court in February 2016 while legal challenges continued; future requirements and impacts were not clear. Avista said it would seek recovery of appropriate compliance costs through rates.
- Other contingencies include the Colstrip Clean Air Act lawsuit, dissolved-gas mitigation and fish-passage work at hydroelectric projects, and a possible claim asserting up to $16 million of indirect exposure in the California refund matter. Management could not predict the outcomes of certain matters; it had not recorded significant amounts for unresolved contingencies at year-end.
- AEL&P has a take-or-pay agreement for the Snettisham hydroelectric project, accounted for as a $64.5 million capital lease obligation at year-end and extending through 2038. The isolated Juneau system relies heavily on hydroelectric supply, with diesel backup, so an extended hydro outage could be costly.
Most important facts for investors to verify
- Whether requested rate increases and regulatory recovery of capital, storm, Project Compass, pension, and environmental costs are approved and timely.
- How much additional Colstrip coal-ash and emissions compliance will cost, and whether further retirement obligations or asset impacts arise.
- Whether operating cash flow can support the elevated capital program, dividends, pension contributions, and debt maturities without materially increasing borrowing or equity issuance.
- Whether energy prices, hydro conditions, customer load, and regulatory deferral balances support the reported utility margins and cash flows.
- Developments in the Colstrip litigation, Pacific Northwest refund proceedings, and other contingencies, including any material change to management’s estimates.
Audit and controls: Deloitte & Touche issued an unqualified opinion on the financial statements and internal control over financial reporting as of December 31, 2015. Management concluded disclosure controls and internal controls were effective at a reasonable assurance level.