Avista Corporation — Q3 2010 Form 10-Q
Business context and reporting period. Avista is an energy company whose principal business is its regulated electric and natural-gas utility in Washington, Idaho and Oregon. It also owns Advantage IQ, a facility information and cost-management business. This unaudited filing covers the three and nine months ended September 30, 2010; dollar amounts below are in millions unless stated otherwise. The independent accountant performed a review, not an audit.
Financial performance and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Operating revenue | $367.2 | $314.7 | $1,184.3 | $1,109.3 |
| Income from operations | $37.7 | $23.8 | $167.3 | $147.7 |
| Net income attributable to Avista | $12.3 | $8.1 | $66.7 | $65.0 |
| Diluted EPS | $0.22 | $0.15 | $1.20 | $1.18 |
| Dividends per common share | $0.25 | $0.21 | $0.75 | $0.60 |
- Q3 revenue rose 16.7% and attributable net income rose 51.7% year over year. Nine-month revenue increased 6.8%, while attributable net income increased 2.6%.
- For the first nine months, operating cash flow was $201.7, down from $234.1 in 2009. Investing cash outflow was $152.4; financing cash outflow was $29.7. Cash ended the period at $56.7.
- Utility capital expenditures were $138.1 for the first nine months. The company estimated approximately $210 of utility capital expenditures for full-year 2010.
- At September 30, total debt was $1,253.0, including $75.0 of short-term borrowings and $61.9 of Spokane Energy nonrecourse debt. Cash was $56.7. Total assets were $3,752.6 and total Avista stockholders’ equity was $1,106.5.
- Available liquidity under committed credit lines and the receivables facility was reported as $335.5. The facilities had maximum combined availability of $445.0 and were due to expire in 2011. The company was in compliance with its debt covenants; debt-to-capitalization was 53.1% against a 70% limit.
Material changes and management commentary
- Q3 utility earnings improved to $9.1 from $7.2, mainly on higher gross margin, including effects of Washington and Idaho rate increases and stronger wholesale electric activity. Nine-month utility earnings declined to $60.9 from $63.2: higher gross margin was offset by warmer first-quarter weather, higher interest expense, operating costs and depreciation.
- Advantage IQ attributable earnings increased to $2.9 for Q3 and $5.9 for nine months, primarily reflecting the 2009 Ecos acquisition and a business-and-occupation tax refund. Management cited low short-term interest rates and weak economic conditions as constraints on organic growth.
- Effective January 1, 2010, new consolidation accounting required Avista to consolidate Spokane Energy. This added assets and nonrecourse debt to the balance sheet but, due to regulatory accounting, did not affect 2010 net income. The company also deconsolidated certain low-income housing entities without an effect on equity or net income.
- The company issued common shares, raising $34.7 in the first nine months, including $33.3 under a sales-agency agreement. It expected to issue up to $45 of common stock during 2010 to maintain its capital structure.
Outlook, risks and contingencies
- Rates and power costs: Idaho electric and natural-gas rate increases took effect October 1, 2010. A Washington rate-case settlement proposed increases effective December 1, subject to regulatory approval. Under that settlement, there would be no Washington Energy Recovery Mechanism deferrals for 2010; Avista would bear the applicable power-cost variance or receive the benefit. ERM deferrals were expected to resume in 2011.
- Planning: Management forecast average annual retail electric and natural-gas load growth of 0.7%–1.9% for 2011–2014, with growth at the lower end in 2011. Utility capital spending was estimated at about $210 annually for 2010–2012. No specific consolidated earnings guidance is provided in the supplied filing text.
- Liquidity and market exposure: Existing credit lines were scheduled to expire in April 2011, and the receivables facility in March 2011; management was evaluating replacement facilities. A downgrade below investment grade combined with specified energy-price declines could require up to $161 of additional collateral, based on the company’s stated assumptions. Derivative provisions alone could require $60.0 of collateral if specified credit triggers were met.
- Environmental and operating obligations: The Spokane River hydroelectric license was estimated to cost $334 over its 50-year term, increasing project power costs by about 40%; additional TMDL mitigation costs were not yet estimable. Other material uncertainties include environmental investigations, hydroelectric fish-passage and dissolved-gas requirements, and evolving greenhouse-gas rules.
- Legal and regulatory matters: Several western energy-market refund proceedings remained unresolved; management said outcomes could not be predicted, but did not expect the California refund matter to materially affect the company. The Harbor Oil environmental matter had a $0.5 investigation-study accrual, with any further liability unclear. A Colstrip property settlement was contested by plaintiffs; Avista said its accrued share was not material. A Washington gas-line safety complaint could involve fines exceeding $1.1, with hearings scheduled for 2011.
- Other considerations: Advantage IQ’s redeemable noncontrolling interests totaled $43.2; former Cadence Network owners had redemption rights in 2011 or 2012 under specified conditions. Management cited subdued employment and economic conditions in parts of its service area. Forward-looking statements are subject to weather, regulatory, commodity-price, financing, environmental, legal, operational and credit risks.
Important facts for investors to verify
- Whether the Washington rate settlement was approved and whether 2010 power costs remained within the company’s exposure under the no-deferral arrangement.
- Progress and terms of replacement credit facilities before 2011 expirations, and the company’s ability to maintain liquidity and access capital.
- Actual utility capital spending, customer/load trends, and cash generation relative to management’s outlook.
- Developments in environmental obligations, the Spokane River TMDL, and unresolved legal and refund proceedings, including any changes to recorded accruals.
- Potential collateral requirements from commodity contracts and credit-rating changes, and any redemption decisions affecting Advantage IQ.