Avista Corporation — Q3 2018 Form 10-Q
Business and period: Avista is primarily a regulated electric and natural gas utility serving the Pacific Northwest and Alaska, with smaller non-utility businesses. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $296.0 million | $297.1 million | $1,024.7 million | $1,048.1 million |
| Net income attributable to Avista shareholders | $10.1 million | $4.5 million | $90.6 million | $88.3 million |
| Basic earnings per share | $0.15 | $0.07 | $1.38 | $1.37 |
| Operating income | $36.4 million | $32.9 million | $183.9 million | $208.3 million |
- Cash flow: Nine-month operating cash flow was $365.8 million, versus $307.5 million in 2017. Investing used $307.7 million, including $296.2 million of utility capital expenditures. Financing used $53.1 million; cash ended the period at $21.2 million.
- Liquidity and debt: Current assets were $245.5 million and current liabilities $346.9 million at September 30. Total debt, including short-term borrowings, current debt and affiliated-trust debt, was about $1.95 billion; shareholders’ equity was $1.75 billion. Debt was 52.7% of total capitalization, unchanged from year-end 2017. Available committed credit was $343.8 million at Avista Corp. and $25 million at AEL&P.
- Dividends: Nine-month dividends paid were $73.6 million, or $1.1175 per share, compared with $69.2 million, or $1.0725 per share, in 2017.
- Utility margin: Avista Utilities’ reported non-GAAP utility margin was $181.1 million in Q3 versus $176.3 million, and $617.4 million year to date versus $626.3 million.
Changes versus 2017
- Q3 shareholder net income more than doubled, primarily as Avista Utilities and AEL&P earnings improved and acquisition costs fell. Q3 revenue was nearly flat.
- Nine-month shareholder net income rose modestly despite lower revenue and operating income. Lower acquisition costs and income taxes helped; weaker utility margin, higher operating and depreciation costs, and increased interest expense offset gains.
- Lower retail energy volumes, largely reflecting milder weather, and lower rates following the federal tax-rate reduction contributed to the year-to-date revenue decline. Customer growth and rate increases partly offset these effects.
- The effective income tax rate fell to 16.1% for the first nine months from 36.9% in 2017, principally reflecting the Tax Cuts and Jobs Act and related regulatory tax treatment.
Outlook, material matters and risks
- Hydro One acquisition: The proposed cash purchase price is $53 per Avista share. The company expected closing in Q4 2018, subject to remaining regulatory approvals and other conditions; it extended the merger agreement deadline to March 29, 2019. Washington, Idaho and Oregon proceedings remained pending. Agreed state commitments would total approximately $78.6 million if approved; transaction costs are not recoverable from customers. A $103 million termination fee may apply in specified circumstances. The filing provides no clear standalone earnings guidance.
- Capital and funding: Avista raised $375 million of 4.35% first mortgage bonds due 2048 and did not expect further long-term debt issuance in 2018. It planned to raise up to $110 million of equity through early 2019. Estimated 2018 Avista Utilities capital expenditures increased from $405 million to $435 million. Management expected available operating cash flow and credit facilities to meet near-term needs, while warning that future operating cash flow may be pressured by tax-law changes, including loss of bonus depreciation and timing of customer tax refunds.
- Operating outlook: Management expected a 2018 benefit under Washington’s ERM, within the 90% customer/10% company sharing band, citing above-normal hydro generation and lower natural-gas fuel prices. The 2018 natural gas plan projected no additional transportation resources over its 20-year planning horizon in Washington, Idaho or Oregon.
- Regulatory uncertainty: A Washington Court of Appeals ruling rejected use of an attrition allowance in rate base and remanded the 2015 rate cases for recalculation. The allowance was $35.2 million; Avista could not estimate how much, if any, would be removed from rates.
- Colstrip and environmental matters: Colstrip Units 3 and 4 were taken out of service in June after particulate-matter testing indicated a deviation from the applicable standard. They passed subsequent compliance tests and returned to service in September; potential state enforcement remained under review. Proposed federal and state climate measures could raise costs, but impacts were not yet estimable.
- Other exposures: Commodity-price volatility and collateral calls, interest rates, severe weather and natural disasters, wildfire and operational risks, and failure to complete the Hydro One transaction could affect results and liquidity. A shareholder lawsuit relating to the merger remained stayed; the company could not predict its outcome.
Most important facts for investors to verify
- Whether the remaining merger approvals were obtained, whether the transaction closed, and whether any termination fee or revised commitments applied.
- The outcome and rate impact of the Washington attrition-allowance remand.
- Whether the planned equity raise, $435 million utility capital program and expected liquidity were realized.
- Actual 2018 ERM results, weather and hydro conditions, and any resulting customer or earnings impacts.
- Any MDEQ enforcement or material costs related to Colstrip, and developments in other environmental proceedings.
The independent accountant’s interim review reported no material modifications believed necessary for conformity with U.S. GAAP; it was a review, not an audit.