Avista Corporation 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing; it also reports fourth-quarter results. Avista is a regulated electric and natural-gas utility, with Ecova as its principal non-utility business (80.2% owned at year-end). Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Operating revenue | $1,618.5 million | $1,547.0 million |
| Income from operations | $244.4 million | $190.1 million |
| Net income attributable to Avista shareholders | $111.1 million | $78.2 million |
| Diluted earnings per share | $1.85 | $1.32 |
| Net cash provided by operating activities | $242.6 million | $316.6 million |
| Utility capital expenditures | $294.4 million | $271.2 million |
- Avista Utilities generated $108.6 million of shareholder-attributable net income, up from $81.7 million. Utility gross margin, a non-GAAP measure, increased to $714.4 million from $661.1 million.
- Ecova shareholder-attributable net income rose to $7.1 million from $1.8 million; revenue was $176.8 million. Its results included a $2.3 million contract milestone rebate.
- Year-end cash and cash equivalents were $82.6 million. Current assets were $549.7 million and current liabilities were $625.3 million.
- Total debt in the company’s capital-structure presentation was $1.56 billion, or 54.6% of debt plus Avista shareholder equity. Shareholder equity was $1.30 billion. The $400 million Avista credit facility had $201.6 million of available capacity after borrowings and letters of credit; Ecova had $46 million outstanding on its separate $125 million facility.
- Cash dividends paid were $73.3 million ($1.22 per share). In February 2014, the board raised the quarterly dividend 4%, to $0.3175 per share.
Changes and significant items
- Consolidated revenue increased $71.5 million and shareholder-attributable net income increased $32.9 million year over year. Utility earnings benefited from rate increases, warmer summer and colder fourth-quarter weather, a $5.1 million net benefit from the BPA transmission settlement, and slightly lower other operating expenses. Higher depreciation and taxes partly offset those benefits.
- Utility revenue rose $49.8 million. Electric gross margin increased $37.6 million and natural-gas gross margin increased $15.7 million. The Colstrip Unit 4 outage and lower hydro generation contributed to a $4.7 million Washington ERM expense, compared with a $6.0 million benefit in 2012.
- Operating cash flow declined $74.0 million, mainly reflecting working-capital movements. Operating cash flow was below utility capital expenditures in 2013; the company also used debt and short-term borrowings to fund capital spending, debt maturities, pension contributions and dividends.
- A Colstrip Unit 4 outage from July 2013 to January 2014 increased estimated 2013 system power-supply costs by about $12 million and reduced gross margin by an estimated $6–$7 million after regulatory sharing. Avista expected insurance to cover repair costs apart from its $0.4 million share of the deductible. A regulatory prudence review was triggered; management did not expect a material effect on cost recovery.
- A $11.7 million BPA payment covered past transmission-system use. Regulatory treatment allowed Avista to retain $5.1 million for shareholders after Washington Reardan project costs; other amounts were allocated to customers. Avista also wrote off $2.5 million of Reardan project costs allocated to Washington.
Outlook, risks and contingencies
- Management forecast 2014–2017 annual customer growth of 0.7%–1.4% for electric and 0.7%–1.5% for gas; retail load growth was forecast at 0.5%–1.0% for electric and 0.7%–1.5% for gas. Growth was expected near the low end in 2014. The 2013 resource plan identified a need for 575 MW of additional natural-gas generation between 2020 and 2033, subject to change as conditions evolve.
- Utility capital expenditures were forecast at approximately $335 million in 2014, $355 million in 2015 and $350 million in 2016. The customer-information and work-management system replacement was expected to finish by year-end 2014, at an estimated total cost of about $80 million.
- Avista filed Washington electric and gas rate cases in February 2014, requesting annual revenue increases of $18.2 million and $12.1 million, respectively; approval was pending. It planned an Idaho rate filing in 2014, with new rates not effective before January 2015. Separately, Oregon-approved gas increases were scheduled in two phases during 2014. Washington’s temporary 2014 rates were due to revert to 2013 levels on January 1, 2015 absent intervening regulatory action.
- The proposed AERC acquisition, announced in November 2013, had a $170 million consideration less AERC debt and was expected to close by July 1, 2014, subject to approvals and other conditions. It was to be funded primarily with Avista shares. Management anticipated slight EPS dilution in 2014 and slight accretion in 2015, and estimated approximately $48 million of goodwill. Avista expected up to $145 million of share issuance and about $190 million of long-term debt issuance in 2014, including financing associated with AERC.
- Key exposures include weather and streamflow variability, wholesale energy prices and collateral calls, regulatory approval and recovery of costs, pension assumptions and funding, and environmental rules affecting thermal generation. The filing reports $26.1 million cash collateral and $20.3 million of letters of credit for energy derivatives at year-end; a below-investment-grade downgrade could increase collateral requirements.
- Legacy western energy-market proceedings remained relevant. Avista reached a settlement in principle intended to resolve several California and Pacific Northwest matters, subject to FERC approval; Seattle continued to pursue claims in a separate proceeding, whose outcome and potential refunds were uncertain. Sierra Club and Montana Environmental Information Center litigation alleged Clean Air Act violations involving Colstrip; the company could not predict the outcome.
- Other matters to monitor include the AERC closing and integration, potential Colstrip-related environmental and regulatory costs, and completion of the critical customer-system upgrade. The filing identifies no clear quantified estimate for the potential exposure in several pending legal and environmental matters.
Important facts for investors to verify
- Track the AERC transaction’s completion, final financing and share issuance, goodwill, and realized earnings contribution against management’s 2014–2015 expectations.
- Check regulatory decisions on the Washington and Idaho rate filings, the scheduled expiration of temporary rates and customer credits, and recovery of deferred costs.
- Monitor operating cash flow relative to the capital program, planned debt issuance, credit-facility availability, dividend payments and pension contributions.
- Verify the final insurance recovery and regulatory prudence-review outcome for the Colstrip Unit 4 outage, and follow Colstrip litigation and emissions-related developments.
- Follow FERC action on the proposed legacy-market settlement and the remaining Seattle claims; the ultimate liability was not established in the filing.
- Assess weather, hydroelectric generation, wholesale energy prices and collateral requirements, as these can materially affect utility margins and liquidity.