Avista Corporation — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparisons are with the same 2010 periods. Amounts are in U.S. dollars. Avista operates regulated electric and natural-gas utilities, alongside Advantage IQ and other non-utility businesses. Interim statements are unaudited; Deloitte’s review found no material modifications needed for GAAP conformity, but was not an audit opinion.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Operating revenue | $360.6m | $360.7m | $837.1m | $817.1m |
| Operating income | $55.5m | $61.7m | $140.3m | $129.6m |
| Net income attributable to Avista | $23.0m | $25.5m | $64.9m | $54.4m |
| Diluted EPS | $0.39 | $0.46 | $1.12 | $0.98 |
| Operating margin (operating income/revenue) | 15.4% | 17.1% | 16.8% | 15.9% |
| Operating cash flow | Not separately reported | Not separately reported | $163.5m | $114.8m |
- Q2 utility gross margin increased $6.7m to $164.6m, but higher utility operating costs, depreciation and taxes contributed to lower quarterly earnings. Advantage IQ earnings also improved.
- First-half utility gross margin rose $32.3m to $354.7m. Colder weather, rate increases and lower power supply costs supported earnings; higher operating costs partly offset the benefit. Colder first-quarter weather contrasted with an unusually warm first quarter in 2010.
- Q2 utility revenue declined $5.7m, while non-utility revenue increased $5.5m. For the first half, utility revenue increased $8.4m and non-utility revenue increased $11.6m. Wholesale electric revenue fell in both comparisons, partly offset by retail growth and fuel sales.
Cash flow, liquidity and debt
- First-half operating cash flow was $163.5m; investing used $64.0m and financing used $99.0m. Utility capital expenditures were $98.9m. Cash increased $0.5m to $69.9m.
- At June 30, total debt was $1.282bn, versus $1.322bn at year-end 2010; debt was 52.3% of total capitalization, down from 54.0%. Total liabilities were $2.623bn and stockholders’ equity was $1.168bn.
- Current assets and current liabilities were $455.3m and $454.9m, respectively. Cash was $69.9m; short-term borrowings were $75.0m. The current ratio was approximately 1.0.
- A new $400m committed credit facility runs to February 2015. At June 30, $75.0m was drawn, $19.0m of letters of credit was outstanding, and $306.0m remained available. Avista reported compliance with its 65% debt-to-capitalization covenant and other financing covenants.
- First-half common dividends were $31.7m, or $0.55 per share. Avista issued $15.9m of common stock in the half and expected to issue up to $25m during 2011 in total.
Outlook, management commentary and key risks
- Capital spending: Utility capital expenditures were expected to be about $250m in 2011 and $230m–$240m annually in 2012 and 2013. Management said operating cash flow and available credit were expected to fund planned capital spending, dividends and other commitments. No earnings-per-share guidance is stated in the filing text provided.
- Rates and regulation: Washington rate cases filed in May 2011 sought annual base revenue increases of $38.3m for electric service and $6.2m for natural gas. Idaho cases filed in July sought $9.0m and $1.9m, respectively. Outcomes and timing remain subject to regulators. Oregon rate increases took effect in March and June 2011.
- Advantage IQ: Growth in energy-management services, expense management and the Loyalton acquisition lifted first-half results. Cadence Network former owners’ redemption rights were not exercised in July 2011 but remain exercisable through July 2012; related redeemable noncontrolling interests were $39.4m. Funding a redemption could require borrowing or additional capital.
- Pensions: Avista expected $26m of pension contributions in 2011, including $17.3m already contributed in the first half, and approximately $110m in total contributions over 2012–2015. The plan’s assets were below its benefit obligation at June 30.
- Energy and collateral exposure: Weather, hydroelectric output, wholesale prices, outages, regulatory cost recovery and counterparty performance can affect earnings and cash needs. If credit-risk triggers were activated on June 30, $38.6m of collateral could have been required for specified derivatives. A separate downgrade-and-price stress scenario estimated potential additional collateral of up to $116m.
- Commitments and contingencies: A 30-year wind power purchase agreement signed in June is expected to provide about 40 average megawatts starting in the second half of 2012; management believes its costs will be recoverable in rates. The Lancaster plant PPA represents about $351m of fixed payments through 2026, which Avista expects to recover through retail rates.
- Several western energy-market refund and legal proceedings remain unresolved. Management did not expect material adverse effects from the California refund period based on current information, but could not predict the outcome or impact of the Pacific Northwest proceeding. Environmental matters include Spokane River dissolved-oxygen mitigation, fish passage and cleanup investigations; some potential costs cannot yet be estimated. The filing also identifies climate and emissions rules, regulatory decisions, financing access, economic conditions and weather as risks.
- Management reported disclosure controls effective at a reasonable assurance level as of June 30, 2011; no material second-quarter change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether Washington and Idaho regulators approve the requested rate increases, and when any approved rates take effect.
- Whether colder-than-normal weather and hydroelectric conditions explain first-half margin gains and how earnings perform under more typical conditions.
- Progress on utility cost growth, 2011 capital spending, pension funding and the planned equity issuance.
- Whether Advantage IQ redemption rights are exercised by July 2012 and how any resulting payment would be funded.
- Developments in energy-market refund cases, environmental obligations, and the potential cash and collateral effects of commodity-price or credit-rating changes.