Business context and reporting period
Avista Corporation’s Form 10-K covers the fiscal year ended December 31, 2011. Avista operates regulated electric and natural gas utilities in the Pacific Northwest and owns 79.2% of Ecova, a North American energy and cost-management services company. The annual results are seasonal and weather-sensitive; fourth-quarter 2011 net income attributable to Avista was $24.6 million and diluted EPS was $0.42, versus $25.7 million and $0.45 in fourth-quarter 2010.
Financial performance and position
| Metric | 2011 | 2010 |
|---|---|---|
| Operating revenue | $1,619.8 million | $1,558.7 million |
| Income from operations | $235.6 million | $230.2 million |
| Net income attributable to Avista | $100.2 million | $92.4 million |
| Diluted EPS | $1.72 | $1.65 |
| Cash from operating activities | $269.5 million | $228.4 million |
- Revenue increased 3.9%; attributable net income rose 8.4%. Operating income increased 2.4%. Net income growth reflected colder first-quarter weather, rate increases, higher Ecova earnings and lower losses in other businesses.
- Avista Utilities generated $90.9 million of attributable net income, compared with $86.7 million. Ecova generated $9.7 million, versus $7.4 million.
- Utility gross margin increased $28.7 million to $653.3 million. Retail electric and gas sales benefited from colder weather and rate increases; lower wholesale electric revenue partly offset these gains.
- Net cash used in investing was $282.3 million, including $239.8 million of utility capital expenditures. Dividends paid were $63.7 million, or $1.10 per share.
- Year-end cash was $74.7 million. Total debt was $1.371 billion, or 53.6% of debt plus Avista stockholders’ equity; equity was $1.186 billion. The $400 million revolving facility had $310 million available at year-end. The company reported compliance with its debt covenants.
- Current assets were $614.6 million and current liabilities $627.2 million; current liabilities include $118.3 million of Ecova client-fund obligations.
Material changes versus the prior comparable period
- Strong hydroelectric output—5.581 million MWh including long-term PUD contracts, compared with 4.179 million in 2010—helped reduce purchased power and generation fuel costs. Colder first-quarter conditions increased retail demand.
- Electric retail revenue rose $51.1 million, while wholesale electric revenue fell $87.2 million, primarily from lower wholesale prices and sales volumes. Natural gas retail revenue rose $40.3 million on higher volumes and rates.
- Ecova revenue increased to $137.8 million from $102.0 million, including acquisitions and organic growth. Ecova acquired Building Knowledge Networks and Prenova during 2011; it acquired LPB Energy Management in January 2012.
- Utility capital expenditures rose to $239.8 million from $202.2 million. Total debt increased to $1.371 billion from $1.322 billion, while operating cash flow increased to $269.5 million from $228.4 million.
- Avista issued $85 million of 4.45% first mortgage bonds due 2041 and $26.5 million of common stock in 2011. The board raised the quarterly dividend to $0.29 per share in February 2012 from $0.275.
Outlook, commentary, risks and unusual items
- Management expects utility capital expenditures of about $250 million annually in 2012–2014; the detailed 2012 budget is $257 million. It expects to issue up to $100 million of long-term debt and $45 million of common stock in 2012.
- Management forecasts annual retail electric and gas load growth of 0.7%–1.9% for 2012–2015, with growth expected near the lower end in 2012. The 2011 resource plan anticipates 750 MW of new natural-gas generation between 2018 and 2031, energy-efficiency savings of 310 aMW cumulatively over 20 years, and additional renewable resources to meet future Washington requirements.
- Avista entered a 30-year power purchase agreement for the planned 105 MW Palouse Wind project, expected to deliver about 40 aMW beginning by the end of 2012. Execution and costs remain subject to project development and contractual terms.
- Key exposures include weather and hydrology, wholesale power and gas prices, regulatory cost recovery, counterparty performance and collateral calls, financing access, outages, environmental requirements, and pending western energy-market proceedings. Management said it believes liquidity is adequate for the next 12 months, but commodity-price or credit-rating changes could increase collateral needs.
- The pension plan was underfunded by $166.0 million at year-end; the reported postretirement-benefit plan deficit was $82.3 million. Management estimated $176 million of pension contributions for 2012–2015, subject to market performance and actuarial assumptions.
- Ecova had $38.9 million of redeemable interests tied to former Cadence Network owners, whose redemption right expired July 31, 2012; employee-related redeemable interests were also outstanding. Ecova’s credit facility was fully utilized following the January 2012 LPB acquisition, and management expected to seek an expansion.
- Pending matters include California and Pacific Northwest energy-market refund proceedings, environmental matters and hydroelectric-license mitigation work. Management did not expect a material impact from several specified matters, but outcomes and some costs remain uncertain. The filing identifies possible mitigation costs for Spokane River water quality and Cabinet Gorge dissolved-gas abatement that could not yet be estimated.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded disclosure controls were effective at a reasonable-assurance level.
Most important facts for investors to verify
- Whether utility earnings and cash generation remain adequate when weather and hydroelectric output return to normal, and how much earnings depended on 2011 conditions.
- Rate-case outcomes, recovery timing and prudence reviews for deferred power, gas, pension and environmental costs.
- Ecova’s post-acquisition performance, financing capacity and potential redemption obligations.
- Actual capital spending, debt and equity issuance, liquidity availability, and pension contributions relative to management’s plans.
- Developments in energy-market litigation, hydroelectric licensing and environmental compliance, including any newly quantified costs or liabilities.