Business context and reporting period
Avista Corporation’s Form 10-K reports the fiscal year ended December 31, 2016; it is an annual filing, not a standalone fourth-quarter report. Avista is principally a regulated electric and natural-gas utility in the Pacific Northwest, with an electric utility subsidiary in Juneau, Alaska (AEL&P), and smaller non-utility businesses.
Financial and operating results
Dollar amounts below are in millions unless otherwise noted.
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Operating revenue | $1,442.5 | $1,484.8 | Down 2.9% |
| Income from operations | $289.8 | $253.2 | Up 14.4% |
| Net income attributable to Avista shareholders | $137.2 | $123.2 | Up 11.4% |
| Diluted EPS from continuing operations | $2.15 | $1.89 | Up 13.8% |
| Operating cash flow | $358.3 | $375.6 | Down $17.4 |
| Utility capital expenditures | $406.6 | $393.4 | Up $13.2 |
- Avista Utilities’ gross margin, a company-presented non-GAAP measure, rose to $833.3 million from $766.9 million. Lower power and gas resource costs, rate changes, and expanded decoupling mechanisms supported the increase.
- Consolidated operating margin was approximately 20.1%, compared with 17.1% in 2015. Higher depreciation, other operating expenses and interest expense partly offset stronger operating results.
- Cash from operations fell short of utility capital spending by approximately $48.4 million. Cash and cash equivalents were $8.5 million at year-end, versus $10.5 million a year earlier.
- Total debt, including short-term borrowings and debt to affiliated trusts, was approximately $1.85 billion; debt represented 52.9% of debt plus shareholder equity. Shareholders’ equity was $1.65 billion.
- Committed credit facilities were $400 million for Avista and $25 million for AEL&P; available liquidity at year-end was $245.6 million and $25 million, respectively. The company reported compliance with its financing covenants.
- Common dividends declared were $1.37 per share for 2016. In February 2017, the board raised the quarterly dividend to $0.3575 per share from $0.3425.
Fourth-quarter context
For the three months ended December 31, 2016, revenue was $402.1 million, operating income was $82.5 million, net income attributable to shareholders was $40.1 million, and diluted EPS was $0.62. Fourth-quarter 2015 shareholder net income was $38.5 million and diluted EPS was $0.61, including discontinued operations.
Material changes versus prior year
- Shareholder net income from continuing operations increased to $137.2 million from $118.1 million. The 2015 reported total also included $5.1 million of discontinued-operations income; 2016 had none.
- Consolidated revenue declined mainly with lower wholesale electricity and natural-gas activity and lower natural-gas prices. Avista Utilities’ retail electric loads fell, while retail natural-gas loads increased; customer-use and weather effects were partly mitigated by decoupling.
- Utility resource costs decreased to $551.4 million from $657.0 million, while utility depreciation and amortization increased to $160.5 million from $143.5 million, reflecting plant additions.
- Debt increased, and the company issued $175 million of 3.54% first mortgage bonds due 2051. It also issued 1.6 million common shares under sales-agency agreements, raising net proceeds of $65.3 million.
Outlook, commentary and key risks
- Washington rates: In December 2016, the UTC denied Avista’s requested $43 million combined electric and natural-gas rate increase. Avista sought reconsideration; a ruling was expected by March 16, 2017. Management estimated that, if the decision remained unchanged, 2017 earnings could be $0.20–$0.30 per diluted share below 2016 actual results. Avista planned to file new Washington rate cases in the second quarter of 2017.
- Other rate proceedings: Idaho electric rates increased 2.6% effective January 2017 under a settlement. Avista requested an 8.5 million-dollar annual natural-gas revenue increase in Oregon in November 2016. AEL&P received a refundable interim increase in November 2016 and sought a further permanent increase.
- Funding and investment: Avista expected 2017 capital expenditures of approximately $405 million at Avista Utilities and $6.9 million at AEL&P. It expected to issue about $110 million of long-term debt and up to $70 million of common stock in the second half of 2017. Management expected operating cash flows and credit facilities to support planned spending, dividends and commitments.
- Load and resources: Avista forecast average annual retail electric and natural-gas load growth of 0.6% and 1.2%, respectively, for 2017–2020. Its 2015 electric resource plan projected adequate resources through 2020 and a need for 565 MW of additional generation capacity during 2020–2034. These are planning estimates, not firm earnings guidance.
- Generation and environmental exposure: The Colstrip operator notified owners it did not plan to operate Units 3 and 4 after May 2018; owners were seeking a replacement operator. Avista owns 15% of those units. Its recorded coal-ash retirement obligation increased to $13.6 million, while future compliance costs remained unquantified. The company also identified uncertainty around greenhouse-gas regulation and Washington’s Clean Air Rule litigation.
- Other risks and contingencies: Weather, hydroelectric output, wholesale commodity prices, regulatory cost recovery, financing access, collateral calls, pension assumptions, outages, wildfire and cyber risk may affect results and liquidity. Avista Energy disputed a third-party assertion that it could owe up to $16 million in a California market proceeding; the company said it could not predict the outcome. Several hydroelectric mitigation matters also had costs that management could not estimate.
- Unusual cash and accounting items: Avista paid $54.0 million to settle interest-rate swaps in connection with its 2016 bond issuance; the amount is to be amortized into interest expense over the debt term. The company reported a $33.9 million increase in income taxes receivable, primarily associated with tax losses and bonus depreciation.
Important facts for investors to verify
- The outcome of the Washington rate-case reconsideration and subsequent rate filings, including the effect on 2017 earnings and cash recovery.
- Whether Colstrip Units 3 and 4 continue operating after May 2018, the availability of a replacement operator, and the related compliance and retirement costs.
- Actual capital spending, debt and equity issuance, and liquidity needs compared with management’s 2017 plans.
- Whether operating cash flow covers capital investment and dividends, and how deferred customer refunds, collateral requirements and rate timing affect cash.
- Developments in the disputed California claim, environmental proceedings, and the recovery of regulatory assets and future compliance costs.
The independent auditor issued an unqualified opinion on the financial statements and on internal control over financial reporting as of December 31, 2016.