Avista Corporation — Q1 2016 Form 10-Q
Business and period: Regulated electric and natural gas utility operations in the Pacific Northwest, plus Alaska Electric Light and Power (AEL&P) and smaller non-utility businesses. This unaudited report covers the three months ended March 31, 2016, compared with Q1 2015; the interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Operating revenues | $418.2 million | $446.5 million |
| Income from operations | $106.1 million | $89.6 million |
| Net income attributable to Avista shareholders | $56.1 million | $46.4 million |
| Diluted EPS | $0.89 | $0.74 |
| Operating margin (income from operations / revenue) | 25.4% | 20.1% |
| Operating cash flow | $105.5 million | $146.8 million |
| Utility capital expenditures | $88.9 million | $81.6 million |
| Dividend declared per share | $0.3425 | $0.33 |
Revenue fell 6.3%, while operating income and shareholder net income rose. Utility resource costs decreased $47.8 million, more than offsetting lower revenues and higher operating and depreciation expenses. Management attributed higher Avista Utilities earnings mainly to rate changes, colder weather versus the prior-year quarter, lower resource costs, and Idaho and Oregon decoupling mechanisms. Weather was still warmer than normal. Avista Utilities gross margin increased about $23.5 million; AEL&P net income rose to $3.0 million from $2.6 million.
Financial position and liquidity
- At March 31, 2016, cash was $12.8 million; current assets were $279.2 million and current liabilities were $431.8 million.
- Total debt, including current maturities, short-term borrowings and affiliated-trust debt, was approximately $1.715 billion; debt was 51.9% of total capitalization, down from 53.1% at year-end 2015. Long-term debt and capital leases were $1.480 billion, and short-term borrowings were $90.0 million.
- Avista’s $400 million revolving facility had $90.0 million drawn and $46.7 million of letters of credit outstanding, leaving $263.3 million available. AEL&P had a separate $25 million facility with no borrowings. Both entities were in covenant compliance.
- Operating cash flow declined $41.2 million year over year, chiefly reflecting working-capital movements, including higher derivative collateral, and lower net cash provided by changes in current assets and liabilities. Investing cash outflow was $91.7 million; financing cash outflow was $11.6 million.
- Shareholders’ equity increased to $1.590 billion from $1.529 billion at year-end, supported by earnings and $27.2 million of net stock issuance, partly offset by dividends.
Changes, outlook and commentary
- Washington rate orders effective January 11, 2016 provided a $10.8 million annual natural gas base-revenue increase and an $8.1 million electric decrease. A customer advocate sought judicial review, including possible refunds; rates remain in effect while the appeal proceeds.
- Avista filed Washington rate cases in February 2016 seeking staged increases beginning in 2017: 7.8% electric and 5.0% natural gas base rates, followed by proposed 2018 steps. These are requests, not approved rates. Proposed returns include a 9.9% ROE.
- Idaho rate settlements took effect January 1, 2016; Oregon natural gas rates increased 4.9% effective March 1. Management expected an Idaho electric rate case and an Alaska electric case in 2016, and an Oregon natural gas filing in the second half of 2016.
- Management expected 2016 financing of approximately $55 million in common stock and $155 million in long-term debt, including repayment of $90 million of maturing debt. Expected 2016 capital expenditures were $375 million for Avista Utilities and $17 million for AEL&P. Management said operating cash flow and committed credit were expected to fund capital spending, dividends and other commitments.
- In March, Avista authorized sales of up to 3.8 million new shares through agency agreements; 0.7 million shares had been issued by quarter-end, with 3.1 million remaining available. The quarterly dividend was increased 3.8% to $0.3425 per share.
- Derivative exposure can create sudden collateral and liquidity demands. At quarter-end, cash collateral posted included $29.6 million for commodity derivatives and $76.0 million for interest-rate swaps. A below-investment-grade downgrade could trigger additional collateral requirements; the company estimated up to $25.4 million for swaps and up to $6.2 million for commodity contracts under its stated analysis.
Risks, contingencies and unusual items
- APX asserted that Avista Energy could be responsible for up to $16 million of a potential California-market disgorgement penalty. Avista disputes the claim and said it could not predict the outcome.
- In the Colstrip Clean Air Act litigation, two projects remained for trial; settlement discussions were ongoing. Management considered a loss reasonably possible but could not estimate the outcome or material impact.
- Costs and outcomes for Cabinet Gorge dissolved-gas mitigation and fish-passage work were not estimable; Avista intends to seek regulatory recovery of appropriate costs.
- Avista reported no significant accruals for unresolved contingencies. The filing also describes ongoing exposure to regulatory decisions, weather and hydro conditions, commodity prices, counterparty performance, credit ratings, and environmental and operational risks.
- Management reported effective disclosure controls at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter. The independent accountant’s interim review was not an audit.
Investor facts to verify
- Track the Washington judicial review and the regulator’s decision on Avista’s pending rate requests; assess potential effects on allowed revenues and returns.
- Compare actual 2016 financing and capital spending with management’s $55 million equity, $155 million debt and $392 million utility/AEL&P capital-spending expectations.
- Monitor operating cash generation, available revolver capacity, debt maturities and collateral requirements, particularly if market prices or credit ratings change.
- Follow the APX assertion, Colstrip litigation and environmental project costs for developments that could change exposure or recovery prospects.
- Assess how much of the earnings increase reflects durable rate and decoupling benefits versus weather, resource-cost movements and other period-specific factors.