Avista Corporation — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2014; comparative results are for the three and nine months ended September 30, 2013 unless noted. Avista is principally a regulated electric and natural gas utility. Results include Alaska Electric Light and Power (AEL&P) from its July 1, 2014 acquisition; Ecova is reported as discontinued operations following its June 30, 2014 sale. Dollar amounts below are in millions unless stated otherwise.
Financial results and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Operating revenue | $301.6 | $289.5 | $1,060.7 | $1,037.5 |
| Income from continuing operations | $10.5 | $8.5 | $89.3 | $73.9 |
| Net income attributable to Avista shareholders | $10.5 | $11.4 | $159.8 | $79.4 |
| Diluted EPS | $0.16 | $0.19 | $2.59 | $1.32 |
| Operating cash flow | Not separately presented for the quarter | $265.7 | $202.4 |
Nine-month 2014 net income included a $68.0 million after-tax gain on the Ecova sale and a benefit from a California power-markets litigation settlement. Continuing-operations diluted EPS was $1.45 for the nine months, versus $1.23 in 2013. The Q3 decline in total shareholder earnings mainly reflects the absence of Ecova earnings after its sale; continuing-operations income improved.
Avista Utilities’ reported non-GAAP gross margin was $154.0 million in Q3, up from $147.8 million, and $545.7 million for nine months, up from $521.4 million. Management attributed the improvement primarily to rate increases and lower power-supply costs, partly offset by Idaho earnings-sharing provisions and higher operating costs. Utility operating margins should not be confused with consolidated GAAP income.
Balance sheet and liquidity: At September 30, cash was $10.4 million, compared with $82.6 million at year-end 2013. Total debt, including current obligations, was approximately $1.51 billion, down from $1.56 billion; debt was 50.3% of total capitalization. The company had $35.0 million drawn and $45.6 million of letters of credit outstanding on its $400 million committed facility, leaving $319.4 million available. Management stated liquidity was adequate for the next 12 months. Nine-month investing cash flow was a $6.8 million use, including Ecova sale proceeds; financing cash flow was a $331.1 million use, including debt repayments, dividends and share repurchases.
Utility property capital expenditures were $229.8 million in the first nine months. Dividends declared were $0.3175 per share in Q3; cash dividends paid were $58.6 million for the nine-month period.
Material changes and unusual items
- Ecova sale: Sold June 30 for $335 million cash, subject to adjustments. Avista expected net proceeds of approximately $133.2 million after debt, minority-holder payments, taxes and expenses, including escrow receipts; the recognized after-tax gain was $68.0 million.
- AERC acquisition: Completed July 1, primarily in exchange for 4.5 million Avista shares, with $4.7 million cash consideration. The preliminary purchase accounting included $50.6 million of goodwill. AEL&P contributed $9.2 million revenue and $0.5 million net income in Q3.
- California power-market settlement: Avista Energy received $15.0 million in June; approximately $6.4 million was contributed to the Avista Foundation. The settlement resolved specified proceedings and management reported no remaining potential liability in those matters.
- Capital actions: AEL&P issued $75 million of 4.54% first-mortgage bonds due 2044. Avista had repurchased 1.924 million shares for $61.0 million through September 30; through October 31 it had repurchased 2.530 million shares for $79.9 million.
Outlook, regulation and risks
- Management forecast Avista Utilities capital expenditures of about $355 million in each of 2014 and 2015 and $350 million in 2016; AEL&P spending was projected at about $3 million for the remainder of 2014 and $15 million annually in 2015 and 2016. The customer-information and work-management systems project was expected to enter service in the first half of 2015; estimated total cost was about $100 million, with $76.4 million spent through September.
- Management expected to issue approximately $100 million of long-term debt and $30 million of common stock in 2015. A separate $60 million Avista bond issue at 4.11%, due 2044, was arranged after quarter-end for expected issuance in December 2014; AERC also expected $15 million of term loans in Q4.
- Washington regulators had a proposed settlement pending for rate changes effective January 2015; Idaho base rates were to remain unchanged through 2015 under an approved extension. An Oregon filing sought a 9.3% natural-gas base-rate increase, with a decision expected by July 2015. These requests and settlements were subject to regulatory action.
- Management expected approximately $50 million of lower 2014 tax payments from a planned federal tax accounting-method change; the filing says the estimate was being evaluated by a third-party specialist.
- Key exposures include weather and hydroelectric conditions, wholesale power and gas prices, cost-recovery and rate decisions, capital-market access, credit/collateral calls and environmental regulation. A Clean Air Act case concerning Colstrip remained pending; management said a loss was reasonably possible but could not estimate the outcome or material impact. The Kettle Falls diesel spill remediation liability was recorded, but management did not expect a material effect.
- The company reported compliance with its credit-facility debt covenant and other stated financing covenants. Deloitte’s interim review reported no material modifications that should be made to the financial statements; it was a review, not an audit opinion on the interim statements.
Most important facts for investors to verify
- Separate recurring utility performance from the Ecova disposal gain and the California settlement when assessing 2014 earnings and EPS.
- Track regulatory outcomes and timing for Washington, Idaho and Oregon rates, including the Idaho earnings-sharing provisions and any customer rebates or decoupling adjustments.
- Confirm Ecova escrow collections, final sale adjustments and tax consequences, and the assumptions behind the anticipated tax-method-change savings.
- Monitor post-acquisition AEL&P results, capital structure, debt service and the Snettisham take-or-pay/capital-lease commitment.
- Assess planned capital spending and financing needs against low reported cash, available credit, share repurchases and potential energy-market collateral demands.
- Follow the Colstrip litigation, environmental remediation and other regulatory or legal contingencies for changes in estimated exposure.