Avista Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited interim results. Avista is primarily a regulated electric and natural-gas utility serving parts of Washington, Idaho and Oregon. Ecova was sold on June 30, 2014; Avista acquired Alaska Energy and Resources Company (AERC) on July 1, 2014, so AERC is not included in the reported-period results.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $312.6 million | $307.5 million | $759.2 million | $748.0 million |
| Continuing net income attributable to Avista shareholders | $31.3 million | $24.2 million | $78.7 million | $65.4 million |
| Continuing EPS, diluted | $0.52 | $0.40 | $1.31 | $1.09 |
| Total net income attributable to Avista shareholders | $100.9 million | $25.7 million | $149.4 million | $68.0 million |
| Total EPS, diluted | $1.67 | $0.43 | $2.48 | $1.13 |
| Dividends declared per share | $0.3175 | $0.305 | $0.635 | $0.61 |
Total earnings include discontinued operations and the Ecova sale; they are not representative of recurring utility earnings. Ecova discontinued-operations income attributable to shareholders was $69.6 million for Q2 and $70.6 million for the first half, including a reported $68.1 million after-tax, after-transaction-cost net gain on sale.
- Utility performance: Avista Utilities’ net income was $26.7 million in Q2, versus $24.6 million, and $74.7 million for the first half, versus $66.8 million. Management attributed improvement principally to rate increases, lower electric supply costs and increased hydroelectric generation; first-quarter colder weather supported year-to-date results, while milder second-quarter weather reduced demand.
- Utility gross margin (company-defined non-GAAP measure): $174.6 million in Q2 versus $171.7 million; $391.7 million for the first half versus $373.6 million. The filing cautions that this measure supplements, and does not replace, GAAP operating income.
- Cash flow: Six-month operating cash flow was $224.0 million versus $155.8 million. Investing activities provided $67.2 million, chiefly reflecting Ecova sale proceeds, versus $154.9 million used in 2013. Financing activities used $165.8 million. Cash at June 30 was $208.0 million.
- Capital spending: Utility property capital expenditures were $136.5 million in the first half. Management forecast utility capital expenditures of about $355 million in 2014, $355 million in 2015 and $350 million in 2016.
- Debt and liquidity: Total debt, including short-term borrowings and current maturities, was $1.486 billion at June 30; debt was 51.3% of total capitalization under the company’s presentation. Current assets were $442.3 million and current liabilities $464.3 million. Avista had a $400 million committed credit facility, with $151.5 million drawn and $21.9 million of letters of credit outstanding at quarter-end; reported available capacity was $226.6 million. The company repaid the $151.5 million borrowing on July 1 using sale proceeds, but expected to borrow again later in Q3 for taxes and share repurchases.
Material changes and transactions
- Ecova sale: Completed June 30 for a stated $335 million cash price, subject to adjustments. The company estimated net proceeds to Avista of $133.2 million after debt, minority and option-holder payments, taxes and expenses. Avista expected to receive $13.6 million of escrow proceeds, including $12.5 million in 2015; some proceeds remain subject to indemnification and working-capital terms.
- California power-market settlement: Avista Energy received $15 million in June. Avista contributed $6.4 million to the Avista Foundation; management described the resulting net earnings benefit as approximately $9.8 million. The settlement resolved several western energy-crisis proceedings and was final.
- AERC acquisition: Closed July 1, after the reporting date, in a transaction involving 4.5 million newly issued Avista shares and $4.7 million cash. Management expected approximately $51 million of goodwill and planned to report AERC as a separate segment. The share issuance increases the post-period share count.
- Revenue increased 1.7% in Q2 and 1.5% for the first half. Continuing earnings and diluted continuing EPS improved in both comparisons, while total net income rose much more sharply primarily because of the Ecova disposition and settlement-related items.
Outlook, risks and other notable items
- Management expected operating cash flow and the $400 million credit facility, alongside planned debt issuance, to fund capital expenditures, dividends and contractual commitments. It forecast about $165 million of long-term debt issuance in 2014, including a planned $75 million AEL&P bond issue at 4.54% due 2044 and $15 million of AERC term loans. These were plans at the filing date, not completed issuances.
- Avista expected to pay approximately $85.8 million of taxes related to the Ecova sale in 2014 and anticipated approximately $50 million of lower tax payments from a planned federal tax accounting-method change, which was under review and not assured.
- The board authorized repurchases of up to 4 million shares through December 31, 2014. By July 31, Avista had repurchased 292,100 shares for $9.4 million. The company said it could terminate the program and did not assure completion.
- Regulatory matters remain important: Washington general rate cases filed in February 2014 sought annual revenue increases of $18.2 million for electric service and $12.1 million for natural gas; a proposed Idaho rate-plan extension would keep base rates unchanged through 2015 and was awaiting approval. Oregon and Alaska rate filings were also under consideration.
- Key exposures include weather and hydroelectric output, wholesale power and gas prices, regulatory cost recovery, financing and collateral demands, and environmental requirements. A proposed federal rule for existing power sources targeted a 30% nationwide emissions reduction by 2030; the potential impact on Avista was not yet determinable.
- A Clean Air Act suit concerning the Colstrip plant remained pending, with trial scheduled for June 2015; the company could not predict the outcome. A 2013 diesel spill of approximately 10,000 gallons at Kettle Falls was under voluntary cleanup; management did not expect a material financial effect. A Seattle-related western power-market claim remained before FERC, although an administrative law judge had rejected the claims; Avista did not expect a material adverse effect.
- The independent accountant performed an interim review, not an audit, and reported no material modifications needed for GAAP conformity. Management concluded disclosure controls were effective at a reasonable-assurance level.
Investor verification priorities
- Separate recurring utility earnings and cash generation from the Ecova disposal gain and California settlement benefit; confirm the related tax and transaction-cost treatment.
- Track realization and timing of Ecova escrow proceeds, the final tax liability, and the anticipated tax-accounting-method savings.
- Verify completion and terms of planned AERC/AEL&P debt issuance, the use of proceeds, post-acquisition leverage, and the effect of 4.5 million new shares and the repurchase program.
- Monitor regulatory decisions on Washington rate cases and the Idaho extension, including allowed returns, rate recovery and customer-sharing mechanisms.
- Assess delivery of the capital program—particularly the customer and work-management system replacement—and exposure to cost overruns, environmental rules, Colstrip litigation and spill remediation.