Avista Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparative period is Q1 2011. Avista operates regulated electric and natural gas utilities and non-utility businesses, including Ecova. Interim financial statements are unaudited and were reviewed by Deloitte & Touche, not audited.
Key financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenues | $452.3 million | $476.6 million | Down 5.1% |
| Operating income | $78.7 million | $84.8 million | Down 7.2% |
| Net income attributable to Avista | $38.4 million | $41.9 million | Down 8.4% |
| Diluted EPS | $0.65 | $0.73 | Down 11.0% |
| Operating cash flow | $121.3 million | $103.3 million | Up $18.0 million |
| Utility capital expenditures | $57.8 million | $49.7 million | Up $8.1 million |
Utility gross margin (revenues less resource costs) rose to $194.9 million from $190.0 million. Consolidated operating margin was approximately 17.4%, versus 17.8% a year earlier. Cash and cash equivalents were $72.7 million at quarter-end.
Total debt was $1.369 billion, or 53.1% of reported debt plus Avista stockholders’ equity. Avista had $342.9 million available under its $400 million committed credit line; the company reported compliance with its 65% debt-to-capitalization covenant. Total assets were $4.254 billion and total liabilities were $2.989 billion.
Material changes and management commentary
- Lower utility revenue largely reflected warmer weather and reduced retail electric and natural gas use; retail electric and natural gas use per customer fell 5% and 4%, respectively. Rate increases and lower resource costs lifted utility gross margin, but higher operating, depreciation and interest expenses contributed to lower utility earnings: $39.5 million versus $40.1 million.
- Ecova revenue increased with business growth and acquisitions, but its result attributable to Avista shifted to a loss of $0.8 million from income of $1.7 million. Management cited acquisition and integration costs, higher operating expenses and increased amortization.
- Ecova acquired LPB Energy Management on January 31, 2012, paying $50.6 million, funded through $25 million of credit-facility borrowings, a $20 million equity infusion and available cash. Ecova’s $60 million credit facility was fully drawn at quarter-end. The company also acquired Prenova in November 2011.
- Operating cash flow improved, supported in part by $49.2 million of working-capital cash inflows. Investing activities used $154.3 million, including $50.3 million of net acquisition payments and utility capital spending. Cash declined $2.0 million during the quarter. Dividends paid were $17.1 million, or $0.29 per share, compared with $15.8 million, or $0.275 per share.
Outlook, risks and contingencies
- Management expected 2012 utility capital expenditures of about $250 million and planned to issue up to $100 million of long-term debt and up to $45 million of common stock. Management said operating cash flow and available credit, together with planned financing, were expected to fund capital expenditures, dividends and other commitments.
- Avista filed Washington electric and natural gas rate increase requests on April 2, 2012, designed to add $41.0 million and $10.1 million of annual revenue, respectively. The electric filing also proposed a one-year customer rebate related to the 2011 Energy Recovery Mechanism balance. These were requests, not approved rate changes. Management expected to file an Idaho rate case in the second half of 2012.
- Former Cadence Network owners had a redemption right expiring July 31, 2012; related redeemable noncontrolling interests were $44.3 million. If exercised, Ecova would need to arrange funding. Total redeemable noncontrolling interests were $57.6 million.
- Energy-market prices, weather, hydroelectric output, regulatory cost recovery and credit ratings can affect results and liquidity. Energy derivative agreements required $20.5 million of cash collateral and $12.5 million of letters of credit at quarter-end; a downgrade below investment grade could trigger additional collateral requirements.
- Regulatory and environmental matters include pending western energy-market refund proceedings, Spokane River water-quality mitigation planning and potential emissions-control requirements. The company said it could not estimate certain future costs, including Spokane River mitigation, and generally intended to seek recovery of utility-related costs through rates. It did not expect several other disclosed claims to have a material effect, but outcomes remain uncertain.
- Management identified no material change in the risk factors from the 2011 Form 10-K. It highlighted uncertainties including economic conditions, financing access, weather, regulation, energy prices, environmental requirements, outages and counterparty performance.
Important facts for investors to verify
- Whether Avista’s Washington rate requests, including its proposed ERM changes and customer rebate, are approved and on what terms.
- Whether Cadence Network holders exercise the July 2012 redemption right and how Ecova funds any redemption.
- Whether Ecova can expand or refinance its credit facility as scheduled reductions in facility size approach, and whether acquired businesses deliver expected growth after integration.
- Progress and potential costs of Spokane River water-quality mitigation, fish passage and emissions-control requirements, along with developments in energy-market refund proceedings.
- How seasonal weather, hydroelectric generation, energy prices, working capital and pension contributions affect full-year cash generation, capital needs and liquidity.