Avista Corporation — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; unaudited interim results. Avista is an energy company with regulated electric and natural gas utility operations and non-utility businesses, including Advantage IQ. The interim financial statements received an independent accountant’s review, not an audit.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2009 period.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $360.7 | $307.1 | $817.1 | $794.6 |
| Operating income | $61.7 | $58.1 | $129.6 | $123.9 |
| Net income attributable to Avista | $25.5 | $25.9 | $54.4 | $56.9 |
| Diluted EPS | $0.46 | $0.47 | $0.98 | $1.04 |
| Operating margin | 17.1% | 18.9% | 15.9% | 15.6% |
- Revenue and earnings: Q2 revenue rose 17.5%, while Avista-attributable net income declined 1.2%. First-half revenue increased 2.8%, but attributable net income declined 4.4%.
- Utility gross margin: $157.9 million in Q2 versus $154.2 million; $322.4 million for the first half versus $325.4 million. Q2 improvement reflected rate increases and higher retail loads, while first-half margin was reduced mainly by warmer first-quarter weather and lower natural-gas usage.
- Cash flow: First-half operating cash flow was $114.8 million, down from $176.5 million. Utility capital expenditures were $80.3 million; cash dividends were $27.5 million. Cash and equivalents ended June at $38.5 million, versus $37.0 million at year-end 2009.
- Debt and liquidity: Total debt was $1.279 billion, or 54.1% of debt plus Avista stockholders’ equity, compared with $1.216 billion and 53.6% at year-end. The balance sheet reported $87.9 million of short-term borrowings. Available liquidity under committed credit lines and the receivables facility was $335.9 million; facilities totaling $395 million were scheduled to expire in 2011. The company reported compliance with its credit covenants.
- Dividends and equity: Dividends paid were $0.25 per share in Q2 and $0.50 per share for the first half, compared with $0.21 and $0.39, respectively, in 2009. Avista issued 435,000 shares for $8.8 million under its sales agency agreement in Q2.
Material changes and management commentary
- Utility earnings attributable to Avista were $24.1 million in Q2 versus $25.4 million, and $51.8 million for the first half versus $56.0 million. Higher interest expense, depreciation and other costs weighed on results; first-half utility results also reflected warmer weather. Washington and Idaho rate increases partly offset these pressures.
- Advantage IQ earnings attributable to Avista increased to $1.5 million for Q2 and $3.0 million for the first half, primarily reflecting the 2009 acquisition of Ecos. Avista owned approximately 76% of Advantage IQ at June 30.
- Effective January 1, 2010, Avista consolidated Spokane Energy under revised VIE accounting rules. This added approximately $64.7 million of nonrecourse debt and an energy-contract receivable to the balance sheet; management said the consolidation did not affect net income because of regulatory accounting. Spokane Energy debt is nonrecourse to Avista Corp.
- Management expected utility capital expenditures of about $210 million for 2010 and projected spending of more than $210 million annually for 2010–2012; estimates remain subject to review. Management also expected to issue up to $45 million of common stock in 2010 and planned to remarket or refund $83.7 million of company-held pollution-control bonds, subject to market conditions.
Outlook, risks and contingencies
- Rates and recovery: Avista filed Washington electric and natural-gas rate cases in March 2010, seeking annual base-revenue increases of $55.3 million and $8.5 million, respectively. A July 2010 Idaho settlement, subject to regulator approval, proposed increases of $21.2 million for electric and $1.8 million for natural gas, effective October 1, 2010. The filing provides no specific full-year earnings guidance.
- Energy and liquidity exposure: Weather, hydroelectric output, wholesale power and gas prices, outages, and regulatory recovery timing can affect earnings and cash needs. Under a specified downgrade and energy-price scenario, Avista estimated potential additional collateral needs of up to $117 million; this is a scenario estimate, not a current obligation. Derivative provisions alone could require $29.6 million of collateral based on June 30 positions and stated triggers.
- Regulatory and environmental commitments: Spokane River hydroelectric license conditions are estimated to cost $334 million over 50 years and increase project power costs by about 40%; potential TMDL mitigation costs are excluded and could not yet be estimated. The Lancaster power-purchase agreement entails about $375 million of future fixed capacity and O&M payments through 2026; Avista believes the costs will be recoverable through retail rates.
- Legal matters: Proceedings concerning historical western energy-market sales, including California and Pacific Northwest refund matters, remain unresolved. Management did not expect a material adverse effect from the California proceedings, but could not predict the Pacific Northwest outcome; no liability was accrued for those matters. Other contingencies include Colstrip property claims, environmental investigations and an injury lawsuit. Management generally did not expect material adverse effects, while noting uncertainty; a nonmaterial liability was accrued for the Colstrip complaint.
- Other risks: Avista highlighted climate and greenhouse-gas rules, hydroelectric licensing and endangered-species requirements, pension funding, counterparty and credit risks, and labor negotiations. A Washington/Idaho labor agreement had expired and negotiations were ongoing; the company did not expect operational disruption.
Important facts for investors to verify
- Progress and outcomes of the Washington and Idaho rate cases, including timing and approved recovery of power and capital costs.
- Renewal of the company’s credit facilities before their 2011 expirations, and the amount of liquidity available after letters of credit and other commitments.
- Whether planned 2010 equity issuance and pollution-control bond remarketing or refinancing were completed, and the resulting debt and dilution effects.
- Actual capital spending, operating cash flow, pension contributions and collateral requirements relative to management’s estimates.
- Developments in western energy refund proceedings, Spokane River mitigation costs, and other environmental or litigation contingencies.