AVISTA CORP annual report, FY2020

Business context and reporting period

Avista Corporation’s Form 10-K covers the fiscal year ended December 31, 2020. Avista is primarily a regulated electric and natural gas utility operating in the Pacific Northwest, with Alaska Electric Light and Power (AEL&P) serving Juneau. Its other businesses include venture and real estate investments. The year was affected by COVID-19, including weaker commercial and industrial electricity demand.

Key financial metrics

• Operating cash flow less utility capital expenditures was approximately negative $73 million. Cash and cash equivalents were $14.2 million at year-end.
• Avista Utilities’ reported electric and natural gas utility margin, a non-GAAP measure, was $880.9 million, up from $853.4 million.
• Debt was 54.0% of total capitalization under the company’s stated capital-structure calculation. Available liquidity at year-end was $270.4 million under Avista Corp.’s credit line and $24.0 million under AEL&P’s line.

Material changes versus the prior comparable period

• Net income fell $67.5 million, chiefly because 2019 included a $103 million Hydro One merger termination fee; 2019 also included $19.7 million of related transaction costs. The fee was not repeated in 2020.
• Operating income increased despite lower total revenue, as utility resource costs declined and utility margin improved. Lower natural gas and power supply costs contributed to the cost decline.
• Avista Utilities reported lower commercial and industrial electric loads, partly offset by residential growth. Its electric retail sales fell about 2% overall year over year; management attributed the commercial and industrial weakness largely to COVID-19 and weather.
• Operating cash flow declined from 2019, which benefited from the merger termination payment. The 2020 cash flow also reflected a $33.5 million net payment to settle interest-rate swaps and higher income taxes receivable.
• Debt increased while equity issuance provided $72.2 million of net proceeds; 1.9 million shares were issued through sales agency agreements.

Outlook, management commentary, risks and unusual items

• Management expected 2021 operating cash flows to be lower than 2020, but said operating cash flows, committed credit lines and planned debt and equity issuance should provide adequate funding for capital expenditures, dividends and other commitments.
• Management forecast average 2021–2024 Avista Utilities customer growth of 1.0% annually for electric and 1.2% for natural gas, with average retail load growth of 0.5% and 1.1%, respectively. These are forecasts, not guarantees.
• Planned utility capital expenditures were approximately $422 million for 2021, comprising $415 million at Avista Utilities and $7 million at AEL&P. The company also expected to issue about $120 million of long-term debt and up to $75 million of equity during 2021.
• Washington and Idaho rate cases were pending or filed after year-end. Management cited regulatory lag from infrastructure investment and delayed filings, and expected rate relief to begin reducing that lag. Requested rates are subject to commission approval and may differ from final outcomes.
• Washington’s Clean Energy Transformation Act effectively bars using coal-fired energy for Washington retail customers after 2025. Avista’s 15% interest in Colstrip Units 3 and 4 carries accelerated depreciation schedules, and owners disagree about future operating and shutdown matters. The company reported a $107.6 million remaining Colstrip investment at year-end.
• Avista announced a 10-year wildfire resiliency plan with expected spending of about $330 million, subject to regulatory recovery. The 2020 Labor Day windstorm caused outages and fires across about 22,000 acres; the company reported no evidence of negligence but said investigations were ongoing and claims could follow. Separate litigation over the 2018 Boyds Fire seeks up to $4.4 million plus private claims; outcomes are uncertain.
• COVID-19-related load weakness, customer payment risks, supply-chain delays, and regulatory recovery remain uncertainties. The company deferred a net $2.8 million benefit to customers for COVID-19 items at year-end, while noting it expected net COVID-related expenses to customers to be deferred in 2021.
• The effective income tax rate was 5.2% in 2020 versus 13.8% in 2019, including benefits from tax items used to offset accelerated Colstrip depreciation. Pension and other postretirement obligations, environmental remediation, and energy-price and interest-rate exposures are additional considerations.
• The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Regulatory accounting was identified as a critical audit matter because asset recovery and customer refunds depend on future regulatory decisions.

Most important facts an investor should verify

• How earnings perform excluding the one-time 2019 Hydro One termination fee, and whether 2020 utility-margin gains are sustainable.
• Final decisions and timing on Washington and Idaho rate cases, including recovery of infrastructure, AMI and wildfire-resiliency costs.
• Potential liabilities, insurance coverage and regulatory treatment related to the 2020 windstorm fires and Boyds Fire litigation.
• Colstrip’s operating outlook, co-owner disputes, retirement costs and the ability to recover remaining investment and environmental obligations.
• Whether 2021 cash generation and planned financing are sufficient to fund capital spending, debt maturities, pension contributions and dividends without materially weakening credit metrics.