Avista Corporation — FY2010 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2010; it is not a standalone fourth-quarter filing. Avista operates regulated electric and natural-gas utilities in the Pacific Northwest and owns approximately 76% of Advantage IQ, a facility-cost and energy-management services business. The financial statements were audited by Deloitte & Touche, which issued unqualified opinions on the financial statements and internal control over financial reporting.
Financial performance and position
| Metric | FY2010 | FY2009 |
|---|---|---|
| Consolidated operating revenue | $1,558.7 million | $1,512.6 million |
| Income from operations | $230.2 million | $200.7 million |
| Net income | $94.9 million | $88.6 million |
| Net income attributable to Avista | $92.4 million | $87.1 million |
| Diluted EPS attributable to Avista | $1.65 | $1.58 |
| Operating cash flow | $228.4 million | $258.8 million |
| Utility capital expenditures | $202.2 million | $205.4 million |
| Cash dividends paid | $55.7 million | $44.4 million |
- Consolidated operating margin, calculated as operating income divided by revenue, was approximately 14.8%, versus 13.3% in 2009.
- Attributable net income increased about 6%; diluted EPS rose about 4%. Avista Utilities’ attributable net income was essentially flat at $86.7 million; Advantage IQ earnings rose to $7.4 million from $5.3 million.
- Cash and cash equivalents were $69.4 million at year-end. Current assets and current liabilities were each about $579 million.
- Total debt was $1.32 billion, or 54.0% of debt plus Avista stockholders’ equity; stockholders’ equity was $1.13 billion. Year-end short-term borrowings were $110 million. A new $400 million committed credit facility was arranged in February 2011, replacing facilities due to expire in April 2011.
- Utility gross margin, defined by the company as utility revenue less resource costs, increased to $624.6 million from $595.7 million. Electric gross margin improved, while natural-gas gross margin declined.
Changes versus the prior comparable period
- Revenue increased 3.1%, while operating income increased 14.7%. Higher electric wholesale sales and fuel sales, Advantage IQ growth, and utility rate increases contributed; lower retail gas revenue partly offset these effects.
- Warmer heating-season weather reduced retail electric and natural-gas usage. Retail natural-gas revenue fell $98.3 million, reflecting lower rates and volumes; retail electric revenue fell $20.6 million, including the end of a Washington power-cost surcharge.
- Electric wholesale revenue rose $77.1 million and fuel-sale revenue rose $73.4 million, driven largely by higher sales volumes and resource-optimization activity. These revenue increases should be considered alongside associated energy costs and regulatory mechanisms.
- Operating cash flow fell $30.3 million, primarily reflecting working-capital use and changes in regulatory cost deferrals. Investing cash outflow was $253.2 million; financing provided $57.2 million.
- Advista consolidated Spokane Energy effective January 1, 2010 following an accounting-standard change. This added reported revenue, expenses, and debt but, according to the filing, had no effect on net income.
- Fourth-quarter attributable net income was $25.7 million and diluted EPS was $0.45, compared with $22.1 million and $0.40, respectively, in fourth-quarter 2009.
Outlook, management commentary, risks, and unusual items
- Management forecast utility capital expenditures of about $250 million in 2011 and $230–$240 million annually in 2012 and 2013. The 2011 plan includes transmission and distribution, generation, customer growth, information technology, and smart-grid investment. Estimates are subject to change.
- Management projected annual retail electric and gas load growth of 0.7%–1.9% for 2011–2014, with growth expected near the low end in 2011. The 2011 electric resource forecast showed 327 aMW of surplus resources, assuming near-normal hydro generation.
- Avista planned Washington and Idaho rate-case filings in the first half of 2011. A proposed Oregon settlement provided for a 3.1% rate increase, subject to regulator approval. The company also planned to issue up to $25 million of common stock in 2011 and expected liquidity from operating cash flow and its new credit line to support planned needs.
- Hydroelectric output was below normal in 2010. Weather, streamflows, wholesale power and gas prices, generating-plant outages, regulatory cost recovery, financing access, and counterparty credit can affect earnings, cash flow, and liquidity. The company reported that a credit downgrade below investment grade, combined with specified energy-price assumptions, could require up to $163 million of additional collateral.
- Major unresolved exposures include western energy-market refund proceedings, environmental matters, and hydroelectric-license requirements. The company stated it did not expect the California refund proceeding to materially affect it, but said outcomes in other proceedings could not be predicted. Costs of Spokane River dissolved-oxygen mitigation were not yet estimable; the hydro project’s license measures were estimated to cost $334 million over 50 years, excluding those mitigation costs.
- Unusual items included a $2.2 million impairment of a fuel-cell investment, a $10.7 million make-whole premium on debt redeemed in 2010 (to be amortized over new debt), and a $0.2 million accrued fine under a natural-gas-line safety settlement. A potential $38.1 million Advantage IQ redemption obligation tied to former Cadence Network owners may become payable in 2011 or 2012 if specified conditions are met.
- The filing reported effective disclosure controls and internal controls. Management said adoption of accounting standards in 2011 was not expected to have a material financial impact.
Important facts for investors to verify
- Whether rate-case outcomes and power- and gas-cost recovery mechanisms allow timely recovery of costs, including the resumption and future treatment of Washington’s ERM.
- Actual 2011 cash generation, capital spending, share issuance, borrowing needs, and compliance with the new credit facility’s 65% debt-to-capitalization covenant.
- Hydroelectric conditions, energy-market prices, collateral requirements, and progress and cost estimates for hydroelectric-license and environmental obligations.
- The resolution and potential financial effects of western energy-market proceedings and other legal or environmental contingencies.
- Whether Advantage IQ’s redeemable interests are exercised, and the resulting funding requirement, alongside the performance and integration of its recent acquisitions.