Avista Corporation — Q2 2016 Form 10-Q
Business context and period. Avista is primarily a regulated electric and natural gas utility serving the Pacific Northwest and Alaska, with other businesses. This unaudited quarterly filing covers the three and six months ended June 30, 2016; the interim financial statements received an independent accountant’s review, not an audit.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $318.8 million | $337.3 million | $737.0 million | $783.8 million |
| Operating income | $61.6 million | $57.4 million | $167.7 million | $146.9 million |
| Net income attributable to Avista shareholders | $27.3 million | $25.2 million | $84.9 million | $71.7 million |
| Diluted earnings per share | $0.43 | $0.40 | $1.34 | $1.14 |
- Utility gross margin: Management’s non-GAAP measure was $196.0 million for Q2, versus $182.8 million; year to date it was $437.1 million, versus $400.2 million. Lower resource costs and rate changes supported margin, while weather and lower loads affected sales.
- Cash flow and investment: Operating cash flow was $156.0 million for the first half, down from $232.1 million. Utility capital expenditures were $182.8 million. Cash and equivalents were $13.5 million at June 30, versus $10.5 million at year-end 2015. Cash flow was pressured in part by an $83.5 million increase in cash collateral posted, primarily for interest-rate swaps.
- Debt and equity: Total debt, including short-term borrowings and current maturities, was $1.784 billion; shareholders’ equity was $1.617 billion. Short-term borrowings rose to $160.0 million from $105.0 million at year-end. The reported debt-to-total-capitalization ratio was 52.5%, within the 65% credit-facility covenant.
- Liquidity: Avista reported $194.2 million available under its $400 million committed facility and an additional $25 million available to AEL&P. Management said liquidity was adequate for the next 12 months. Current liabilities exceeded current assets; access to committed facilities is an important liquidity source.
- Dividends and share issuance: Dividends declared were $0.3425 per share in Q2 and $0.6850 for the first half. The company issued about 1.2 million shares under sales-agency agreements, generating $46.3 million net proceeds.
Material changes versus prior periods
- Despite lower revenue, shareholder net income increased in Q2 and the first half. Avista attributed improved utility earnings mainly to higher gross margin from rate changes, lower energy resource costs and decoupling mechanisms; first-quarter colder weather also benefited year-to-date results.
- Lower natural gas prices and wholesale sales volumes reduced both revenue and resource costs. In Q2, utility revenue fell $17.9 million while utility resource costs fell $31.3 million, after intercompany eliminations.
- Operating cash flow declined year over year, reflecting increased collateral deposits, seasonal working-capital movements and higher deferred income taxes, among other items.
- Utility plant investment continued: net utility property increased to $3.991 billion from $3.899 billion at December 31, 2015. Depreciation and amortization also rose.
Outlook, commentary, risks and unusual items
- Financing and capital plans: Management expected to issue approximately $75 million of common stock in 2016, including amounts already issued, and $175 million of long-term debt. The debt plan included refinancing $90 million of maturities; management expected to extend $70 million of a term loan until the planned debt issuance. Capital expenditures were described as significant and focused on generation, transmission, distribution and infrastructure.
- Rate proceedings: Washington’s 2015 rate-case orders established rates effective January 2016, including an $8.1 million electric base-revenue decrease and a $10.8 million natural-gas increase. A customer advocate sought judicial review; the rates remained in effect while the appeal proceeded. Avista also filed 2016 rate cases in Washington and Idaho and expected further filings in Oregon and Alaska. Requested increases are proposals, not approved outcomes.
- Weather and regulatory mechanisms: Weather-sensitive demand, wholesale commodity prices, regulatory cost recovery and decoupling affect results. The filing says natural-gas decoupling revenue recognition had reached its maximum for 2016 in Washington and Idaho and was close to the maximum in Oregon; further amounts could be recognized in a later period.
- Accounting item: Early adoption of share-based-payment guidance resulted in a $1.6 million income-tax benefit for the first half. Because adoption was applied retrospectively to January 1, 2016, the benefit was not included in Q2-only results.
- Collateral and interest-rate risk: At June 30, the company had posted $117.0 million cash and $22.0 million in letters of credit for interest-rate swaps. A below-investment-grade credit rating could trigger additional collateral requirements; the filing estimates up to $18.5 million for swaps and separately discusses commodity-related collateral exposure.
- Contingencies: APX asserted that Avista Energy could face up to $16.0 million of indirect liability tied to a California market proceeding; Avista disputes the claim and cannot predict the outcome. A proposed Colstrip consent decree filed after quarter-end would resolve litigation without monetary payments and require shutdown of Units 1 and 2 by July 2022; those units are owned by other parties. The company could not estimate costs for Cabinet Gorge dissolved-gas mitigation or fish-passage work.
- Other risks: Management highlighted exposure to weather, regulation, commodity markets, financing and interest rates, pension assumptions, environmental requirements, operational disruptions and litigation. It reported no material change to the risk factors in its 2015 Form 10-K.
Important facts for investors to verify
- Progress and final outcomes of the Washington rate-order appeal and the 2016 rate cases in Washington and Idaho, including approved rates and cost recovery.
- Whether planned debt issuance and equity sales occur on expected terms, and how refinancing needs affect leverage, interest expense and share dilution.
- Future cash flow, capital spending and liquidity, particularly changes in derivative collateral requirements and the company’s ability to maintain credit ratings.
- Resolution and potential financial exposure from the APX assertion, Colstrip consent decree, and Cabinet Gorge environmental and fish-passage obligations.
- How decoupling deferrals, weather, commodity prices and the $1.6 million tax benefit affect reported earnings and cash generation in subsequent periods.