Avista Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparative period is Q1 2021. Avista is primarily a regulated electric and natural gas utility serving the Pacific Northwest and Alaska. Interim financial statements are unaudited and were reviewed by the independent accounting firm.
Key financial results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Operating revenues | $462.0 million | $412.9 million | +$49.2 million (+11.9%) |
| Income from operations | $83.0 million | $101.9 million | -$18.9 million |
| Net income | $71.6 million | $68.0 million | +$3.5 million (+5.2%) |
| Diluted EPS | $0.99 | $0.98 | +$0.01 |
| Operating cash flow | $161.9 million | $145.1 million | +$16.8 million |
| Utility capital expenditures | $96.0 million | $97.2 million | -$1.2 million |
Revenue growth reflected higher natural gas rates and commodity prices, increased customer usage and growth, and higher wholesale sales. These gains did not translate into stronger operating income: utility resource costs rose $52.3 million, with higher natural gas and generation fuel costs, while operating expenses and depreciation also increased. Avista Utilities’ combined electric and natural gas utility margin, a non-GAAP measure, declined to $262.4 million from $266.0 million. Net income nevertheless increased, principally because income taxes shifted from $12.2 million of expense to a $10.8 million benefit. Management expects a negative 17.8% effective tax rate for full-year 2022.
Cash, debt and liquidity
- Cash and cash equivalents were $203.6 million at March 31, up from $22.2 million at year-end. Operating cash flow included the return of $38.6 million of collateral previously posted for derivatives; the company also paid $17.0 million to settle interest-rate swaps.
- Total debt, including current debt and leases, was $2.715 billion, or 54.9% of debt plus shareholders’ equity, versus $2.603 billion and 54.7% at year-end. Shareholders’ equity was $2.233 billion.
- In March, Avista issued $400 million of 4.00% first mortgage bonds due 2052, primarily to repay its revolving credit-line borrowings. In April, it used remaining proceeds and credit-line borrowings to repay $250 million of maturing debt.
- At March 31, the company reported no Avista Corp. revolver borrowings and $370.7 million of available liquidity under its $400 million facility; AEL&P had a separate $25 million facility. Management said liquidity was adequate for the next 12 months. The company was in compliance with credit covenants.
- Q1 common stock issuance generated $37.9 million. Management expected total 2022 equity issuance of $120 million, including shares already issued, and said it did not expect further long-term debt issuance during the year.
Changes, outlook and management commentary
- Management attributed improved net income mainly to the effects of Washington and Idaho rate cases completed in 2021, including tax benefits, customer growth and benefits from joining the Western Energy Imbalance Market in March. Higher power-supply costs, depreciation and operating and maintenance costs partly offset these factors.
- Avista forecast inflation of just over 5% for 2022 and said it believed costs could be managed to that level. It cited higher power, natural gas, fuel and operating costs, as well as supply-chain delays linked to the pandemic, staffing constraints and the Ukraine/Russia conflict. Commodity recovery through regulatory mechanisms may lag costs incurred.
- Washington 2022 electric and gas rate cases seek staged base-revenue increases beginning in December 2022 and 2023; these remain subject to regulatory review. The company filed out-of-cycle Washington and Idaho gas-rate updates in April, proposed for July 1, 2022. It expects to file Idaho rate cases in the first half of 2023.
- The company expected an expense position in Washington’s Energy Recovery Mechanism by year-end 2022, within the customer/company sharing band. It also said regulatory lag from infrastructure investment was expected to continue through 2022 and that it aimed to align earned returns more closely with authorized returns by 2023.
- Avista estimated spending approximately $330 million over 10 years on its Wildfire Resiliency Plan; certain costs may be deferred for later recovery through rates. It expected 2022 pension contributions of $42 million, of which $14 million had been made in Q1.
Risks, contingencies and unusual items
- Wildfire-related litigation and claims remain significant uncertainties. These include the Babb Road Fire lawsuits, the Boyds Fire claim seeking up to $4.4 million plus private claims, and an April 2022 Road 11 Fire claim seeking $5 million. The company could not predict adverse outcomes or estimate potential losses for these matters. It also disclosed unresolved Colstrip co-owner disputes and other claims, including a potential federal claim of approximately $6 million related to damage allegations at National Park Service property.
- Colstrip faces regulatory deadlines under Washington’s Clean Energy Transformation Act and ongoing owner disputes over operation and closure. The company could not estimate the outcome or financial impact of related litigation.
- Higher wholesale commodity prices can increase supply costs, cash requirements and collateral needs. At March 31, energy-contract collateral included $4.6 million cash and $25 million of letters of credit; a downgrade below investment grade could require additional collateral.
- The $17.0 million interest-rate-swap settlement was recorded for amortization over the life of the related debt. The negative income-tax expense was a material contributor to the quarter’s net-income increase.
Most important facts to verify
- Whether the 2022 Washington rate-case requests and proposed gas-rate adjustments are approved, and when changes take effect.
- Whether higher commodity and operating costs are recovered on schedule through regulatory mechanisms, and how the ERM sharing band affects results.
- Updates to wildfire claims and litigation, particularly potential exposure that the company said it could not estimate.
- Execution of planned 2022 equity issuance, capital spending and debt repayment, and continued compliance with credit covenants.
- Whether the unusually favorable tax benefit and management’s negative full-year effective-tax-rate estimate persist through 2022.