Business context and reporting period
Avista Corporation filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company primarily operates regulated electric and natural gas utilities in the Pacific Northwest and Alaska, alongside smaller non-utility businesses. Comparisons below are with the corresponding 2018 periods.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $283.8 million | $296.0 million | $981.1 million | $1,024.7 million |
| Operating income | $30.2 million | $36.4 million | $137.1 million | $183.9 million |
| Net income attributable to Avista shareholders | $5.1 million | $10.1 million | $146.2 million | $90.6 million |
| Diluted EPS | $0.08 | $0.15 | $2.21 | $1.37 |
- Margins: Avista Utilities’ non-GAAP utility margin was $176.5 million in Q3, down from $181.1 million, and $616.8 million for nine months, compared with $617.4 million. Q3 electric margin was pressured by power costs and a customer-refund accrual; natural gas margin was also affected by the accrual.
- Cash flow: Nine-month operating cash flow was $340.5 million, versus $365.8 million. Utility capital expenditures were $321.0 million, compared with $296.2 million. Cash and cash equivalents were $14.5 million at September 30.
- Debt and liquidity: Total debt was $2.19 billion, including lease obligations; debt represented 53.7% of total capitalization, below the 65% credit-facility covenant limit. Avista had $179.5 million available under its $400 million credit facility; AEL&P had an unused $25 million facility expiring in November 2019. The company reported covenant compliance.
- Dividends and equity: Dividends declared were $0.3875 per share for Q3 and $1.1625 year to date. Avista issued $42.9 million of common stock in the first nine months.
Material changes versus the prior comparable period
- Q3 revenue fell about 4% and shareholder net income fell about 50%. Management cited the Washington customer-refund accrual, lower utility revenues, higher operating and depreciation costs, and lower AEL&P results; general rate increases and customer growth partly offset the declines.
- Nine-month shareholder net income rose to $146.2 million, primarily reflecting the $103 million Hydro One termination fee. The increase also benefited from the METALfx sale and investment results, but was partly offset by transaction costs, taxes on the termination fee, a community donation commitment, higher operating costs, and depreciation.
- Avista sold METALfx in April for a reported after-tax gain of approximately $2.3 million; net sale proceeds were $16.4 million. Utility capital spending increased year over year.
Outlook, commentary, risks, contingencies and unusual items
- Rates and regulatory lag: Management expects regulatory lag during 2019–2021, with a goal of better aligning earned returns with authorized returns by 2022. A settlement in principle in the Washington 2019 rate case remained subject to filing and commission approval. An Idaho electric case settlement submitted in October proposed a $7.2 million annual base-revenue decrease, subject to approval; Oregon approved a natural gas settlement providing a $3.6 million annual revenue increase effective January 15, 2020.
- Guidance and financing: Management expected a 2019 effective tax rate of approximately 16%–17%, estimated 2019 Avista Utilities capital expenditures at $435 million (up from $405 million), and expected $65 million of 2019 equity issuance. A $180 million private offering of 3.43% first mortgage bonds due 2049 was scheduled for November 2019, with proceeds intended partly to refinance debt and reduce credit-line borrowings. Management said available cash flows and credit facilities should meet needs for the next 12 months.
- Energy transition and investment: Avista set goals of carbon-neutral electricity supply by the end of 2027 and 100% clean electricity by 2045, contingent in part on future technology being available and affordable. Washington’s clean-energy law requires coal-fired resources to be excluded from Washington retail service by the end of 2025 and establishes later clean-energy targets. Avista expects to seek recovery of related costs through regulation.
- Other plans: Avista signed an agreement to join the California Independent System Operator’s Energy Imbalance Market, targeting full participation by April 2022. It estimated implementation costs of about $25 million over three years and annual benefits of about $6 million, with net costs expected to be pursued through regulatory recovery.
- Contingencies and accounting items: Avista accrued approximately $3 million for potential refunds tied to the 2015 Washington rate cases; other parties asserted possible refunds ranging from approximately $3 million to $77 million. The company disputes those positions, and the outcome remains uncertain. A Washington state lawsuit over the 2018 Boyds Fire seeks suppression costs; damages and potential liability were not estimable. A FERC audit led to a roughly $37 million reclassification from utility plant to regulatory assets, with no earnings or EPS effect.
- Additional unusual items: The company recorded a one-time Colstrip depreciation charge in Q2 related to accelerated depreciation, offset by tax benefits. The $103 million Hydro One termination fee was partly used to reimburse transaction costs; 2019 merger transaction costs were $19.7 million before tax. Commodity prices, weather and hydroelectric generation, regulatory cost recovery, collateral demands, wildfire exposure, environmental requirements, and access to financing remain important risks.
Important facts for investors to verify
- How much, if anything, Avista ultimately must refund in the 2015 Washington rate-case remand, and the timing of any customer credits.
- Whether the Washington settlement in principle and Idaho electric settlement receive regulatory approval, and the resulting timing and magnitude of rate changes.
- Completion and use of proceeds from the planned $180 million bond issuance, renewal of AEL&P’s credit facility, and execution of the expected equity issuance.
- Whether operating cash flow can support the elevated capital program, dividends, debt service and pension funding without greater borrowing or dilution.
- Developments in the Boyds Fire litigation, Colstrip coal supply and clean-energy compliance, and the cost and recoverability of EIM implementation.