Avista Corporation — Q1 2011 Form 10-Q
Business and period: Avista is an energy company with regulated electric and natural-gas operations in the Pacific Northwest, plus non-utility businesses led by Advantage IQ. This unaudited quarterly report covers the three months ended March 31, 2011, compared with Q1 2010; the interim statements were reviewed by Deloitte, not audited.
Key financial results
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Operating revenue | $476.6 million | $456.4 million | +4.4% |
| Income from operations | $84.8 million | $67.8 million | +25.1% |
| Net income attributable to Avista | $41.9 million | $28.8 million | +45.5% |
| Diluted earnings per share | $0.73 | $0.52 | +$0.21 |
| Operating margin | 17.8% | 14.9% | +2.9 percentage points |
| Operating cash flow | $103.3 million | $81.1 million | +$22.2 million |
Operating revenue growth reflected higher utility retail sales and rate increases, as well as Advantage IQ growth and its acquisition of Loyalton. Operating income improved primarily on higher utility gross margin. Avista Utilities’ net income rose to $40.1 million from $27.8 million; Advantage IQ contributed $1.7 million versus $1.4 million. The filing attributes utility improvement mainly to colder weather, lower power-supply costs relative to amounts in base rates, and rate increases.
Cash, debt and liquidity
- Cash and equivalents were $61.8 million at March 31, down from $69.4 million at year-end 2010. Operating activities provided $103.3 million; investing activities provided $0.2 million; financing activities used $111.0 million.
- Utility capital expenditures were $49.7 million in the quarter. Management expects approximately $250 million for full-year 2011.
- Total debt, including short-term borrowings and nonrecourse debt, was $1.275 billion, versus $1.322 billion at December 31. Debt represented 52.3% of the company’s stated capital structure, down from 54.0%.
- Avista replaced its prior facilities with a $400 million committed credit line maturing in February 2015. At quarter-end, $65 million was drawn, $22.1 million of letters of credit was outstanding, and $312.9 million of availability remained. The company reported compliance with its 65% debt-to-capitalization covenant.
- Current assets were $465.2 million and current liabilities were $454.1 million. The quarter’s cash flow included a $47.6 million decrease in customer funds held and corresponding customer-fund obligations.
- Dividends paid were $0.275 per share, up from $0.25. The board declared a quarterly dividend of $0.275 per share in February.
Material changes, outlook and risks
- Drivers and comparability: Colder weather lifted electric and gas retail usage; residential electric use per customer increased 11% and residential gas use 20% year over year. General rate increases took effect in Idaho and Washington in 2010 and in Oregon in March 2011. Wholesale electric and gas revenues declined, partly offsetting retail growth.
- Rates and investment: Management planned to file a Washington general rate case in Q2 2011 and continued evaluating Idaho rate plans. It issued an RFP for up to 35 aMW of renewable energy, or up to 100 MW of wind nameplate capacity, with deliveries beginning in 2012. Utility capital spending was forecast at $230–$240 million annually for 2012–2013.
- Advantage IQ: The prior Cadence Network owners had redemption rights over shares valued at $33.6 million at quarter-end, exercisable in July 2011 or July 2012 if the business had not been liquidated through an IPO or sale. Management said funding could be sought through credit, owner capital or new investors. Avista purchased $5.6 million of these interests in January.
- Commodity and liquidity exposure: Energy derivative contracts can require collateral following price movements or a credit downgrade. The filing estimates $33.3 million of collateral would be required if specified credit triggers were activated at quarter-end; a separate stress scenario estimated up to $133 million of additional collateral under assumed energy-price declines and a downgrade below investment grade.
- Contingencies: California and Pacific Northwest energy-market refund proceedings remain unresolved. Management did not expect a material adverse impact from the California refund proceeding based on currently known information, but stated it could not predict the outcome or potential impact of the Pacific Northwest proceeding. Environmental and hydroelectric-license obligations also remain, including Spokane River dissolved-oxygen mitigation plans due by May 2012; associated costs were not yet estimable.
- Other risks and commentary: The company cited weather and hydro conditions, regulatory cost recovery, wholesale energy prices, financing access, environmental rules and potential generation outages as risks. It said Dodd-Frank implementation could affect trading costs or credit terms, but the ultimate impact was unclear. Management expected available liquidity to meet needs for the next 12 months.
Most important facts for investors to verify
- Whether earnings growth persists after the effects of colder weather, rate increases and favorable utility supply costs.
- Progress and expected economics of the planned Washington rate case, renewable procurement and $250 million 2011 utility investment program.
- Whether Advantage IQ redemption rights are exercised and how any resulting funding need is met.
- Changes in credit-line availability, debt levels and potential collateral requirements under adverse commodity-price or rating scenarios.
- Developments in energy-market refund litigation and environmental or hydroelectric licensing matters, including any newly estimable liabilities.