Avista Corporation — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Avista is primarily a regulated electric and natural gas utility serving the Pacific Northwest and Alaska, with other businesses. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Operating revenue | $303.3 million | $313.6 million | $1,040.4 million | $1,097.5 million |
| Operating income | $39.6 million | $35.9 million | $207.3 million | $182.8 million |
| Net income attributable to Avista shareholders | $12.2 million | $13.0 million | $97.1 million | $84.7 million |
| Diluted EPS | $0.19 | $0.21 | $1.53 | $1.35 |
| Dividends declared per share | $0.3425 | $0.3300 | $1.0275 | $0.9900 |
- Margins and drivers: Avista Utilities’ electric and natural gas gross margin, a non-GAAP measure, totaled $172.0 million in Q3 versus $163.1 million, and $609.1 million for nine months versus $563.3 million. Lower energy costs and rate increases supported margins; weather, lower wholesale activity and lower retail electric loads weighed on revenues. Consolidated operating margin was not presented as a distinct measure.
- Cash flow: Nine-month operating cash flow was $254.1 million, down from $311.2 million. Investing used $315.0 million, including $288.1 million of utility capital expenditures; financing provided $57.4 million. Cash ended at $7.1 million, down from $10.5 million at year-end 2015.
- Debt and liquidity: Total debt was $1.817 billion; debt represented 52.7% of total capitalization, versus 53.1% at year-end. Current liabilities were $341.9 million and current assets $284.4 million. The $400 million credit facility had $139.8 million available; AEL&P had a separate $25 million facility with no borrowings. The company reported compliance with debt covenants.
- Balance sheet: Total assets were $5.215 billion and shareholders’ equity $1.629 billion at September 30, 2016.
Changes versus comparable periods
- Q3 shareholder net income declined $0.8 million, despite higher operating income. Management attributed the decline mainly to increased losses at other businesses from initial organization costs and management fees on a new investment, plus higher interest expense and income taxes. Avista Utilities and AEL&P earnings increased.
- Nine-month shareholder net income rose $12.4 million. Higher utility gross margin, including rate increases and new Idaho and Oregon decoupling mechanisms, was partly offset by lower wholesale revenues and weather-related load changes, higher operating expenses and depreciation, and greater losses in other businesses.
- Operating cash flow fell $57.1 million, reflecting changes in deferred taxes, collateral and working-capital movements, and a $54.0 million cash settlement of interest-rate swaps. Utility capital expenditures increased from $272.8 million to $288.1 million.
- Avista issued approximately 1.6 million shares under sales agency agreements, raising $65.6 million net; total common shares outstanding rose to 64.2 million from 62.3 million at year-end.
Outlook, management commentary and risks
- Management expected a 2016 effective tax rate of approximately 36.1% and stated that cash flows and available credit were expected to fund capital expenditures, dividends and other commitments. The filing provides no company-wide earnings guidance.
- A $175 million private-placement first mortgage bond issue was scheduled for December 2016, with a 3.54% coupon and 2051 maturity. Proceeds were intended to repay a $70 million term loan and reduce credit-line borrowings. Including settled swaps and estimated issuance costs, the expected effective rate was approximately 5.63%.
- Washington rate cases filed in February 2016 sought staged electric and natural gas increases beginning in 2017; regulatory decisions were pending. A customer advocate’s judicial challenge to the prior Washington rate order remained pending, with existing rates continuing during review. An Idaho electric rate settlement was filed in October 2016 and awaited approval; an Oregon natural gas case was expected in Q4 2016. AEL&P filed for an Alaska electric rate increase in September.
- Washington’s adopted Clean Air Rule was being challenged by Avista and other utilities. Avista said the rule applies to emissions associated with natural gas delivered to customers not otherwise covered; the financial effect was not estimable. A Washington carbon-tax initiative was headed to the November 2016 ballot.
- Key exposures include regulatory recovery and rate-case outcomes; weather and hydroelectric conditions; wholesale energy prices and counterparty performance; interest rates, pension assumptions and collateral demands; environmental regulation and litigation; and operational, wildfire, cyber and reliability risks. A credit downgrade below investment grade could trigger additional collateral; the company estimated up to $32.2 million for interest-rate swaps and up to $4.4 million for energy derivatives under stated assumptions.
- Unusual and contingent items: Avista paid $54.0 million to settle six interest-rate swaps during Q3. An energy-market participant asserted possible indirect liability of up to $16 million in a California refund matter; Avista disputed liability and could not predict the outcome. No significant accruals were recorded for unresolved contingencies. The Colstrip Clean Air Act settlement required shutdown of Units 1 and 2, owned by other parties, by July 2022, with no monetary payments by the parties. Seattle’s remaining Pacific Northwest refund claims were settled and the appeal withdrawn in October 2016.
- Avista entered a $25 million commitment to a private-equity fund, with $2.1 million funded by September 30, and contracted for Washington advanced meters and related services estimated at $49.3 million, plus $0.5 million annual maintenance for 15 years. Meter installation was expected to start in the second half of 2017; recovery remained subject to future regulatory review.
Investor verification priorities
- Track pending rate cases and the judicial challenge to Washington’s prior electric and natural gas rate order, including any customer-refund exposure.
- Verify completion and terms of the planned $175 million bond issuance and repayment of the term loan and credit-line balance.
- Monitor operating cash flow, capital spending, debt levels, available credit and collateral requirements on derivatives.
- Assess whether decoupling deferrals and other regulatory assets are recoverable through customer rates, particularly as recognition limits apply.
- Follow the California market liability assertion, environmental and climate-rule proceedings, and costs or obligations arising from meter replacement and fish-passage work.