AVISTA CORP quarterly report, Q2 FY2013

Avista Corporation — Q2 2013 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2013. Avista is an energy company whose principal business is its regulated electric and natural-gas utility; it also owns 79% of Ecova, a facility and energy cost-management services provider. Interim financial statements are unaudited and were reviewed by Deloitte & Touche.

Financial performance and condition

Metric	Q2 2013	Q2 2012	Six months 2013	Six months 2012
Operating revenue	$352.0 million	$343.6 million	$835.0 million	$795.8 million
Operating income	$57.7 million	$46.0 million	$142.8 million	$122.4 million
Net income attributable to Avista shareholders	$25.7 million	$18.2 million	$68.0 million	$56.6 million
Diluted EPS	$0.43	$0.31	$1.13	$0.96

Revenue increased about 2.5% in Q2 and 4.9% for the first half; shareholder net income rose about 41% and 20%, respectively. Approximate operating margin improved to 16.4% from 13.4% in Q2 and to 17.1% from 15.4% for the first half.
Q2 utility gross margin increased $13.9 million to $171.7 million; first-half utility gross margin increased $20.9 million to $373.6 million. Ecova revenue increased $4.5 million in Q2 and $9.9 million in the first half, with higher service volumes and new services; operating costs also rose.
Six-month operating cash flow was $155.8 million, down from $199.7 million. Investing cash outflow was $154.9 million; utility capital expenditures were $145.3 million. Financing provided $9.1 million. Cash increased to $85.4 million from $75.5 million at year-end.
At June 30, current assets were $468.7 million and current liabilities $582.5 million. Total debt, including current debt and borrowings, was $1.457 billion; debt was 53% of total capitalization, unchanged from year-end. Stockholders’ equity was $1.294 billion.
Avista’s $400 million credit facility had $95.5 million drawn and $24.1 million of letters of credit outstanding, leaving $280.4 million available. The company reported compliance with debt covenants. Ecova had $52.0 million drawn on its $125 million facility and approximately $17.3 million of additional covenant-compliant borrowing capacity.
Dividends paid were $0.305 per share in Q2 and $0.61 per share for the first half, versus $0.29 and $0.58 in the comparable 2012 periods.

Material changes versus prior periods

Utility earnings benefited from Washington rate increases, the Bonneville Power Administration settlement and, in Q2, warmer weather that increased cooling demand. First-half utility earnings also benefited from the settlement, while resource costs and depreciation increased.
First-half cash from operations declined mainly because working-capital cash contributions were lower than in 2012; utility capital expenditures increased by $24.9 million. The 2012 comparison included $50.3 million of acquisition cash spending, principally for Ecova acquisitions.
Ecova’s shareholder-attributable earnings increased to $1.5 million in Q2 from $1.1 million and to $2.7 million for the first half from $0.3 million.
The company corrected an immaterial 2012 expense classification error. The reclassification did not affect net income or EPS.

Outlook, risks and unusual items

Management expected utility capital expenditures of approximately $270 million in 2013 and $260 million annually in 2014 and 2015. A customer information and work-management systems replacement was expected to cost about $80 million in total and finish by the end of 2014.
Management expected to issue up to $50 million of common stock in 2013. It also expected an August 2013 $90 million loan, with proceeds intended to refinance $50 million of debt maturing in December, reduce credit-line borrowings and fund general purposes. These were expectations, not completed transactions as of the filing date.
On July 1, 2013, after quarter-end, Colstrip Unit 4 suffered an unplanned outage. The unit could be unavailable for at least six months; estimated repair costs were about $30 million for all owners, with insurance claims planned. Avista estimated its net gross-margin impact at $6–$7 million for the rest of 2013 after customer-sharing mechanisms. The outage could trigger a Washington prudence review if plant availability falls below 70% for the year.
Rate-case settlements provided phased Washington and Idaho rate changes. Management planned an Oregon general rate case filing in Q3 2013. Most power and gas cost changes are subject to regulatory recovery mechanisms, but timing of recovery can pressure cash flow.
FERC-related California and Pacific Northwest energy-market proceedings remain unresolved. Management did not expect material California refund losses based on currently known facts; it could not predict the Pacific Northwest proceeding’s outcome or potential impact. A new Clean Air Act suit concerning Colstrip was also pending; the company said the outcome could not yet be predicted.
Other notable items included a $2.5 million write-off of Reardan wind-project costs allocated to Washington and a $0.5 million pretax impairment of an energy-storage investment. Avista received $11.7 million from Bonneville for past transmission use; regulatory treatment allocated benefits between shareholders and customers.
Key risks include weather and hydro conditions, wholesale power and gas prices, regulatory cost recovery, generation outages, financing access and collateral calls. At June 30, the company had $24.5 million cash collateral and $22.1 million letters of credit posted for energy derivatives. A downgrade below investment grade could increase collateral requirements.

Most important facts for investors to verify

Whether Colstrip Unit 4 returned to service on schedule, repair costs and insurance recoveries, and the final impact on Avista’s earnings and regulatory recovery.
Whether the expected $90 million loan and planned common-stock issuance were completed, and how they affected debt, liquidity and share count.
Progress and outcomes in the pending FERC proceedings and Colstrip environmental litigation, including any change in estimated exposure.
Execution of planned utility capital spending and the customer-systems project, and whether regulators accept the associated costs in rates.
Ecova’s revenue growth, margins, debt-covenant headroom and any ownership or monetization plans; management said a potential transaction was uncertain.
Cash-flow conversion, working-capital trends, pension contributions and the availability of credit facilities as commodity prices and collateral demands change.