AVA-2013.06.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________________________________________
Form 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED June 30, 2013 OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission file number 1-3701
__________________________________________________________________________________________
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AVISTA CORPORATION |
(Exact name of Registrant as specified in its charter) |
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| | |
Washington | | 91-0462470 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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1411 East Mission Avenue, Spokane, Washington | | 99202-2600 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: 509-489-0500
Web site: http://www.avistacorp.com
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None |
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | x | Accelerated filer | ¨ |
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x
As of July 31, 2013, 59,985,467 shares of Registrant’s Common Stock, no par value (the only class of common stock), were outstanding.
AVISTA CORPORATION
INDEX
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Part I. Financial Information | | |
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FORWARD-LOOKING STATEMENTS
From time to time, we make forward-looking statements such as statements regarding projected or future:
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• | strategic goals and objectives; |
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• | business environment; and |
These statements have underlying assumptions (many of which are based, in turn, upon further assumptions). Such statements are made both in our reports filed under the Securities Exchange Act of 1934, as amended (including this Quarterly Report on Form 10-Q), and elsewhere. Forward-looking statements are all statements except those of historical fact including, without limitation, those that are identified by the use of words that include “will,” “may,” “could,” “should,” “intends,” “plans,” “seeks,” “anticipates,” “estimates,” “expects,” “forecasts,” “projects,” “predicts,” and similar expressions. Forward-looking statements (including those made in this Quarterly Report on Form 10-Q) are subject to a variety of risks and uncertainties and other factors. Many of these factors are beyond our control and they could have a significant effect on our operations, results of operations, financial condition or cash flows. This could cause actual results to differ materially from those anticipated in our statements. Such risks, uncertainties and other factors include, among others:
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• | weather conditions (temperatures, precipitation levels and wind patterns) which affect energy demand and electric generation, including the effect of precipitation and temperature on hydroelectric resources, the effect of wind patterns on wind-generated power, weather-sensitive customer demand, and similar impacts on supply and demand in the wholesale energy markets; |
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• | state and federal regulatory decisions that affect our ability to recover costs and earn a reasonable return including, but not limited to, disallowance or delay in the recovery of capital investments and operating costs; |
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• | changes in wholesale energy prices that can affect operating income, cash requirements to purchase electricity and natural gas, value received for wholesale sales, collateral required of us by counterparties on wholesale energy transactions and credit risk to us from such transactions, and the market value of derivative assets and liabilities; |
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• | economic conditions in our service areas, including customer demand for utility services; |
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• | the effect of increased customer energy efficiency; |
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• | our ability to obtain financing through the issuance of debt and/or equity securities, which can be affected by various factors including our credit ratings, interest rates and other capital market conditions and the global economy; |
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• | the potential effects of legislation or administrative rulemaking, including possible effects on our generating resources of restrictions on greenhouse gas emissions to mitigate concerns over global climate changes; |
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• | changes in actuarial assumptions, interest rates and the actual return on plan assets for our pension and other postretirement medical plans, which can affect future funding obligations, pension and other postretirement medical expense and pension and other postretirement medical plan liabilities; |
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• | volatility and illiquidity in wholesale energy markets, including the availability of willing buyers and sellers, and prices of purchased energy and demand for energy sales; |
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• | the outcome of pending regulatory and legal proceedings arising out of the “western energy crisis” of 2000 and 2001, including possible refunds; |
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• | the outcome of legal proceedings and other contingencies; |
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• | changes in, and compliance with, environmental and endangered species laws, regulations, decisions and policies, including present and potential environmental remediation costs; |
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• | wholesale and retail competition including alternative energy sources, suppliers and delivery arrangements and the extent that new uses for our services may materialize; |
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• | the ability to comply with the terms of the licenses for our hydroelectric generating facilities at cost-effective levels; |
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• | severe weather or natural disasters that can disrupt energy generation, transmission and distribution, as well as the availability and costs of materials, equipment, supplies and support services; |
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• | explosions, fires, accidents, mechanical breakdowns, or other incidents that may cause unplanned outages at any of our generation facilities, transmission and distribution systems or other operations; |
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• | public injuries or damages arising from or allegedly arising from our operations; |
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• | blackouts or disruptions of interconnected transmission systems (the regional power grid); |
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• | disruption to information systems, automated controls and other technologies that we rely on for our operations, communications and customer service; |
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• | terrorist attacks, cyber attacks or other malicious acts that may disrupt or cause damage to our utility assets or to the national economy in general, including any effects of terrorism, cyber attacks or vandalism that damage or disrupt information technology systems; |
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• | delays or changes in construction costs, and/or our ability to obtain required permits and materials for present or prospective facilities; |
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• | changes in the costs to implement new information technology systems and/or obstacles that impede our ability to complete such projects timely and effectively; |
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• | changes in the long-term climate of the Pacific Northwest, which can affect, among other things, customer demand patterns and the volume and timing of streamflows to our hydroelectric resources; |
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• | changes in industrial, commercial and residential growth and demographic patterns in our service territory or changes in demand by significant customers; |
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• | the loss of key suppliers for materials or services; |
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• | default or nonperformance on the part of any parties from which we purchase and/or sell capacity or energy; |
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• | deterioration in the creditworthiness of our customers; |
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• | potential decline in our credit ratings, with effects including impeded access to capital markets, higher interest costs, and certain ratings trigger covenants in our financing arrangements and wholesale energy contracts; |
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• | increasing health care costs and the resulting effect on health insurance provided to our employees and retirees; |
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• | increasing costs of insurance, more restricted coverage terms and our ability to obtain insurance; |
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• | work force issues, including changes in collective bargaining unit agreements, strikes, work stoppages or the loss of key executives, availability of workers in a variety of skill areas, and our ability to recruit and retain employees; |
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• | the potential effects of negative publicity regarding business practices - whether true or not - which could result in litigation or a decline in our common stock price; |
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• | changes in technologies, possibly making some of the current technology obsolete; |
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• | changes in tax rates and/or policies; |
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• | changes in the payment acceptance policies of Ecova’s client vendors that could reduce operating revenues; |
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• | potential difficulties for Ecova in integrating acquired operations and in realizing expected opportunities, diversions of management resources and losses of key employees, challenges with respect to operating new businesses and other unanticipated risks and liabilities; and |
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• | changes in our strategic business plans, which may be affected by any or all of the foregoing, including the entry into new businesses and/or the exit from existing businesses. |
Our expectations, beliefs and projections are expressed in good faith. We believe they are reasonable based on, without limitation, an examination of historical operating trends, our records and other information available from third parties. However, there can be no assurance that our expectations, beliefs or projections will be achieved or accomplished. Furthermore, any forward-looking statement speaks only as of the date on which such statement is made. We undertake no obligation to
update any forward-looking statement or statements to reflect events or circumstances that occur after the date on which such statement is made or to reflect the occurrence of unanticipated events. New risks, uncertainties and other factors emerge from time to time, and it is not possible for us to predict all such factors, nor can we assess the effect of each such factor on our business or the extent that any such factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statement.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended June 30
Dollars in thousands, except per share amounts
(Unaudited)
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| | | | | | | |
| 2013 | | 2012 |
Operating Revenues: | | | |
Utility revenues | $ | 297,719 |
| | $ | 293,315 |
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Ecova revenues | 44,560 |
| | 40,080 |
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Other non-utility revenues | 9,769 |
| | 10,190 |
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Total operating revenues | 352,048 |
| | 343,585 |
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Operating Expenses: | | | |
Utility operating expenses: | | | |
Resource costs | 126,511 |
| | 135,992 |
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Other operating expenses | 65,784 |
| | 64,981 |
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Depreciation and amortization | 29,025 |
| | 27,754 |
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Taxes other than income taxes | 21,608 |
| | 20,435 |
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Ecova operating expenses: | | | |
Other operating expenses | 37,716 |
| | 34,750 |
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Depreciation and amortization | 4,072 |
| | 3,359 |
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Other non-utility operating expenses: | | | |
Other operating expenses | 9,415 |
| | 10,082 |
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Depreciation and amortization | 175 |
| | 212 |
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Total operating expenses | 294,306 |
| | 297,565 |
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Income from operations | 57,742 |
| | 46,020 |
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Interest expense | 19,861 |
| | 19,188 |
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Interest expense to affiliated trusts | 117 |
| | 137 |
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Capitalized interest | (942 | ) | | (596 | ) |
Other income-net | (2,436 | ) | | (1,601 | ) |
Income before income taxes | 41,142 |
| | 28,892 |
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Income tax expense | 15,412 |
| | 10,360 |
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Net income | 25,730 |
| | 18,532 |
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Net income attributable to noncontrolling interests | (73 | ) | | (354 | ) |
Net income attributable to Avista Corporation shareholders | $ | 25,657 |
| | $ | 18,178 |
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Weighted-average common shares outstanding (thousands), basic | 59,937 |
| | 58,702 |
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Weighted-average common shares outstanding (thousands), diluted | 59,962 |
| | 58,924 |
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Earnings per common share attributable to Avista Corporation shareholders: | | | |
Basic | $ | 0.43 |
| | $ | 0.31 |
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Diluted | $ | 0.43 |
| | $ | 0.31 |
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Dividends paid per common share | $ | 0.305 |
| | $ | 0.29 |
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The Accompanying Notes are an Integral Part of These Statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Six Months Ended June 30
Dollars in thousands, except per share amounts
(Unaudited)
|
| | | | | | | |
| 2013 | | 2012 |
Operating Revenues: | | | |
Utility revenues | $ | 728,846 |
| | $ | 698,775 |
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Ecova revenues | 86,967 |
| | 77,090 |
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Other non-utility revenues | 19,141 |
| | 19,977 |
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Total operating revenues | 834,954 |
| | 795,842 |
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Operating Expenses: | | | |
Utility operating expenses: | | | |
Resource costs | 356,141 |
| | 347,004 |
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Other operating expenses | 131,228 |
| | 130,303 |
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Depreciation and amortization | 56,960 |
| | 55,072 |
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Taxes other than income taxes | 47,425 |
| | 45,601 |
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Ecova operating expenses: | | | |
Other operating expenses | 73,706 |
| | 70,524 |
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Depreciation and amortization | 7,565 |
| | 6,195 |
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Other non-utility operating expenses: | | | |
Other operating expenses | 18,760 |
| | 18,349 |
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Depreciation and amortization | 365 |
| | 380 |
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Total operating expenses | 692,150 |
| | 673,428 |
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Income from operations | 142,804 |
| | 122,414 |
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Interest expense | 39,553 |
| | 38,325 |
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Interest expense to affiliated trusts | 235 |
| | 277 |
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Capitalized interest | (1,882 | ) | | (1,121 | ) |
Other income-net | (4,581 | ) | | (3,310 | ) |
Income before income taxes | 109,479 |
| | 88,243 |
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Income tax expense | 40,648 |
| | 31,498 |
|
Net income | 68,831 |
| | 56,745 |
|
Net income attributable to noncontrolling interests | (833 | ) | | (179 | ) |
Net income attributable to Avista Corporation shareholders | $ | 67,998 |
| | $ | 56,566 |
|
Weighted-average common shares outstanding (thousands), basic | 59,926 |
| | 58,642 |
|
Weighted-average common shares outstanding (thousands), diluted | 59,954 |
| | 58,937 |
|
Earnings per common share attributable to Avista Corporation shareholders: | | | |
Basic | $ | 1.13 |
| | $ | 0.96 |
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Diluted | $ | 1.13 |
| | $ | 0.96 |
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Dividends paid per common share | $ | 0.61 |
| | $ | 0.58 |
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The Accompanying Notes are an Integral Part of These Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Three Months Ended June 30
Dollars in thousands
(Unaudited)
|
| | | | | | | |
| 2013 | | 2012 |
Net income | $ | 25,730 |
| | $ | 18,532 |
|
Other Comprehensive Income (Loss): | | | |
Unrealized investment gains/(losses) - net of taxes of $(721) and $137, respectively | (1,222 | ) | | 230 |
|
Reclassification adjustment for realized gains on investment securities included in net income - net of taxes of $(6) and $(78), respectively | (10 | ) | | (130 | ) |
Change in unfunded benefit obligation for pension and other postretirement benefit plans - net of taxes of $99 and $91, respectively | 183 |
| | 168 |
|
Total other comprehensive income (loss) | (1,049 | ) | | 268 |
|
Comprehensive income | 24,681 |
| | 18,800 |
|
Comprehensive income attributable to noncontrolling interests | (73 | ) | | (354 | ) |
Comprehensive income attributable to Avista Corporation shareholders | $ | 24,608 |
| | $ | 18,446 |
|
For the Six Months Ended June 30
Dollars in thousands
(Unaudited)
|
| | | | | | | |
| 2013 | | 2012 |
Net income | $ | 68,831 |
| | $ | 56,745 |
|
Other Comprehensive Income (Loss): | | | |
Unrealized investment gains/(losses) - net of taxes of $(760) and $176, respectively | (1,292 | ) | | 299 |
|
Reclassification adjustment for realized gains on investment securities included in net income - net of taxes of $(7) and $(83), respectively | (11 | ) | | (141 | ) |
Change in unfunded benefit obligation for pension and other postretirement benefit plans - net of taxes of $198 and $173, respectively | 367 |
| | 321 |
|
Total other comprehensive income (loss) | (936 | ) | | 479 |
|
Comprehensive income | 67,895 |
| | 57,224 |
|
Comprehensive income attributable to noncontrolling interests | (833 | ) | | (179 | ) |
Comprehensive income attributable to Avista Corporation shareholders | $ | 67,062 |
| | $ | 57,045 |
|
The Accompanying Notes are an Integral Part of These Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
Dollars in thousands
(Unaudited)
|
| | | | | | | |
| June 30, | | December 31, |
| 2013 | | 2012 |
Assets: | | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 85,411 |
| | $ | 75,464 |
|
Accounts and notes receivable-less allowances of $44,341 and $44,155, respectively | 147,851 |
| | 193,683 |
|
Utility energy commodity derivative assets | 2,250 |
| | 4,139 |
|
Regulatory asset for utility derivatives | 27,876 |
| | 35,082 |
|
Investments and funds held for clients | 92,345 |
| | 88,272 |
|
Materials and supplies, fuel stock and natural gas stored | 45,322 |
| | 47,455 |
|
Deferred income taxes | 32,860 |
| | 34,281 |
|
Income taxes receivable | 131 |
| | 2,777 |
|
Other current assets | 34,647 |
| | 24,641 |
|
Total current assets | 468,693 |
| | 505,794 |
|
Net Utility Property: | | | |
Utility plant in service | 4,185,614 |
| | 4,054,644 |
|
Construction work in progress | 133,166 |
| | 143,098 |
|
Total | 4,318,780 |
| | 4,197,742 |
|
Less: Accumulated depreciation and amortization | 1,214,604 |
| | 1,174,026 |
|
Total net utility property | 3,104,176 |
| | 3,023,716 |
|
Other Non-current Assets: | | | |
Investment in exchange power-net | 15,108 |
| | 16,333 |
|
Investment in affiliated trusts | 11,547 |
| | 11,547 |
|
Goodwill | 76,762 |
| | 75,959 |
|
Intangible assets-net of accumulated amortization of $31,260 and $26,030, respectively
| 42,457 |
| | 46,256 |
|
Long-term energy contract receivable of Spokane Energy | 46,446 |
| | 52,033 |
|
Other property and investments-net | 64,021 |
| | 46,542 |
|
Total other non-current assets | 256,341 |
| | 248,670 |
|
Deferred Charges: | | | |
Regulatory assets for deferred income tax | 70,192 |
| | 79,406 |
|
Regulatory assets for pensions and other postretirement benefits | 297,042 |
| | 306,408 |
|
Other regulatory assets | 105,737 |
| | 103,946 |
|
Non-current utility energy commodity derivative assets | 135 |
| | 1,093 |
|
Non-current regulatory asset for utility derivatives | 31,588 |
| | 25,218 |
|
Other deferred charges | 13,892 |
| | 18,928 |
|
Total deferred charges | 518,586 |
| | 534,999 |
|
Total assets | $ | 4,347,796 |
| | $ | 4,313,179 |
|
The Accompanying Notes are an Integral Part of These Statements.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued) Dollars in thousands
(Unaudited)
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| | | | | | | |
| June 30, | | December 31, |
| 2013 | | 2012 |
Liabilities and Equity: | | | |
Current Liabilities: | | | |
Accounts payable | $ | 153,425 |
| | $ | 198,914 |
|
Client fund obligations | 94,059 |
| | 87,839 |
|
Current portion of long-term debt | 50,320 |
| | 50,372 |
|
Current portion of nonrecourse long-term debt of Spokane Energy | 15,662 |
| | 14,965 |
|
Short-term borrowings | 95,500 |
| | 52,000 |
|
Utility energy commodity derivative liabilities | 22,373 |
| | 29,515 |
|
Other current liabilities | 151,122 |
| | 142,544 |
|
Total current liabilities | 582,461 |
| | 576,149 |
|
Long-term debt | 1,181,925 |
| | 1,178,367 |
|
Nonrecourse long-term debt of Spokane Energy | 9,812 |
| | 17,838 |
|
Long-term debt to affiliated trusts | 51,547 |
| | 51,547 |
|
Long-term borrowings under committed line of credit | 52,000 |
| | 54,000 |
|
Regulatory liability for utility plant retirement costs | 244,225 |
| | 234,128 |
|
Pensions and other postretirement benefits | 263,270 |
| | 283,985 |
|
Deferred income taxes | 517,830 |
| | 524,877 |
|
Other non-current liabilities and deferred credits | 122,488 |
| | 110,215 |
|
Total liabilities | 3,025,558 |
| | 3,031,106 |
|
Commitments and Contingencies (See Notes to Condensed Consolidated Financial Statements) |
| |
|
| | | |
Redeemable Noncontrolling Interests | 7,817 |
| | 4,938 |
|
Equity: | | | |
Avista Corporation Stockholders’ Equity: | | | |
Common stock, no par value; 200,000,000 shares authorized; 59,980,023 and 59,812,796 shares outstanding, respectively | 895,255 |
| | 889,237 |
|
Accumulated other comprehensive loss | (7,636 | ) | | (6,700 | ) |
Retained earnings | 406,195 |
| | 376,940 |
|
Total Avista Corporation stockholders’ equity | 1,293,814 |
| | 1,259,477 |
|
Noncontrolling Interests | 20,607 |
| | 17,658 |
|
Total equity | 1,314,421 |
| | 1,277,135 |
|
Total liabilities and equity | $ | 4,347,796 |
| | $ | 4,313,179 |
|
The Accompanying Notes are an Integral Part of These Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30
Dollars in thousands
(Unaudited)
|
| | | | | | | |
| 2013 | | 2012 |
Operating Activities: | | | |
Net income | $ | 68,831 |
| | $ | 56,745 |
|
Non-cash items included in net income: | | | |
Depreciation and amortization | 64,890 |
| | 61,647 |
|
Provision (benefit) for deferred income taxes | (1,404 | ) | | 6,522 |
|
Power and natural gas cost amortizations (deferrals), net | (430 | ) | | 8,822 |
|
Amortization of debt expense | 1,895 |
| | 1,926 |
|
Amortization of investment in exchange power | 1,225 |
| | 1,225 |
|
Stock-based compensation expense | 3,080 |
| | 3,158 |
|
Equity-related AFUDC | (2,746 | ) | | (1,748 | ) |
Pension and other postretirement benefit expense | 21,478 |
| | 19,758 |
|
Amortization of Spokane Energy contract | 5,587 |
| | 5,136 |
|
Write-off of Reardan wind generation capitalized costs | 2,534 |
| | — |
|
Other | 3,893 |
| | 4,071 |
|
Contributions to defined benefit pension plan | (29,340 | ) | | (29,400 | ) |
Changes in working capital components: | | | |
Accounts and notes receivable | 43,443 |
| | 55,719 |
|
Materials and supplies, fuel stock and natural gas stored | 2,133 |
| | 869 |
|
Other current assets | (11,365 | ) | | 15,694 |
|
Accounts payable | (27,106 | ) | | (3,456 | ) |
Other current liabilities | 9,197 |
| | (6,971 | ) |
Net cash provided by operating activities | 155,795 |
| | 199,717 |
|
| | | |
Investing Activities: | | | |
Utility property capital expenditures (excluding equity-related AFUDC) | (145,344 | ) | | (120,476 | ) |
Other capital expenditures | (1,344 | ) | | (2,266 | ) |
Federal grant payments received | 2,297 |
| | 4,483 |
|
Cash paid by subsidiaries for acquisitions, net of cash received | — |
| | (50,310 | ) |
Decrease (increase) in funds held for clients | 10,675 |
| | (16,424 | ) |
Purchase of securities available for sale | (31,949 | ) | | (64,850 | ) |
Sale and maturity of securities available for sale | 15,130 |
| | 71,492 |
|
Other | (4,369 | ) | | (4,158 | ) |
Net cash used in investing activities | (154,904 | ) | | (182,509 | ) |
The Accompanying Notes are an Integral Part of These Statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
For the Six Months Ended June 30
Dollars in thousands
(Unaudited)
|
| | | | | | | |
| 2013 | | 2012 |
Financing Activities: | | | |
Net increase in short-term borrowings | $ | 43,500 |
| | $ | 30,000 |
|
Borrowings from Ecova line of credit | 3,000 |
| | 25,000 |
|
Repayment of borrowings from Ecova line of credit | (5,000 | ) | | — |
|
Redemption and maturity of long-term debt | (359 | ) | | (11,264 | ) |
Maturity of nonrecourse long-term debt of Spokane Energy | (7,329 | ) | | (6,694 | ) |
Long-term debt and short-term borrowing issuance costs | (21 | ) | | (130 | ) |
Cash received (paid) for settlement of interest rate swap agreements | 2,901 |
| | (18,547 | ) |
Issuance of common stock | 3,017 |
| | 3,575 |
|
Cash dividends paid | (36,667 | ) | | (34,101 | ) |
Purchase of subsidiary noncontrolling interest | (325 | ) | | (784 | ) |
Increase in client fund obligations | 6,220 |
| | 9,764 |
|
Issuance of subsidiary noncontrolling interest | — |
| | 3,714 |
|
Other | 119 |
| | 1,013 |
|
Net cash provided by financing activities | 9,056 |
| | 1,546 |
|
| | | |
Net increase in cash and cash equivalents | 9,947 |
| | 18,754 |
|
| | | |
Cash and cash equivalents at beginning of period | 75,464 |
| | 74,662 |
|
| | | |
Cash and cash equivalents at end of period | $ | 85,411 |
| | $ | 93,416 |
|
| | | |
Supplemental Cash Flow Information: | | | |
Cash paid during the period: | | | |
Interest | $ | 36,960 |
| | $ | 36,277 |
|
Income taxes | 29,005 |
| | 12,217 |
|
Non-cash financing and investing activities: | | | |
Accounts payable for capital expenditures | 2,860 |
| | 4,381 |
|
Redeemable noncontrolling interests | 2,931 |
| | (3,031 | ) |
The Accompanying Notes are an Integral Part of These Statements.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NONCONTROLLING INTERESTS
For the Six Months Ended June 30
Dollars in thousands
(Unaudited)
|
| | | | | | | |
| 2013 | | 2012 |
Common Stock, Shares: | | | |
Shares outstanding at beginning of period | 59,812,796 |
| | 58,422,781 |
|
Issuance of common stock | 167,227 |
| | 335,154 |
|
Shares outstanding at end of period | 59,980,023 |
| | 58,757,935 |
|
Common Stock, Amount: | | | |
Balance at beginning of period | $ | 889,237 |
| | $ | 855,188 |
|
Equity compensation expense | 2,968 |
| | 2,241 |
|
Issuance of common stock, net of issuance costs | 3,017 |
| | 3,575 |
|
Equity transactions of consolidated subsidiaries | 33 |
| | 49 |
|
Balance at end of period | 895,255 |
| | 861,053 |
|
Accumulated Other Comprehensive Loss: | | | |
Balance at beginning of period | (6,700 | ) | | (5,637 | ) |
Other comprehensive income | (936 | ) | | 479 |
|
Balance at end of period | (7,636 | ) | | (5,158 | ) |
Retained Earnings: | | | |
Balance at beginning of period | 376,940 |
| | 336,150 |
|
Net income attributable to Avista Corporation shareholders | 67,998 |
| | 56,566 |
|
Cash dividends paid (common stock) | (36,667 | ) | | (34,101 | ) |
Valuation adjustments and other noncontrolling interests activity | (2,076 | ) | | 2,332 |
|
Balance at end of period | 406,195 |
| | 360,947 |
|
Total Avista Corporation stockholders’ equity | 1,293,814 |
| | 1,216,842 |
|
Noncontrolling Interests: | | | |
Balance at beginning of period | 17,658 |
| | 174 |
|
Net income attributable to noncontrolling interests | 777 |
| | 71 |
|
Deconsolidation of variable interest entity | — |
| | (673 | ) |
Other | 2,172 |
| | — |
|
Balance at end of period | 20,607 |
| | (428 | ) |
Total equity | $ | 1,314,421 |
| | $ | 1,216,414 |
|
Redeemable Noncontrolling Interests: | | | |
Balance at beginning of period | $ | 4,938 |
| | $ | 51,809 |
|
Net income attributable to noncontrolling interests | 56 |
| | 108 |
|
Issuance of subsidiary noncontrolling interests | — |
| | 3,714 |
|
Purchase of subsidiary noncontrolling interests | (325 | ) | | (784 | ) |
Valuation adjustments and other noncontrolling interests activity | 3,148 |
| | (1,423 | ) |
Balance at end of period | $ | 7,817 |
| | $ | 53,424 |
|
The Accompanying Notes are an Integral Part of These Statements.
|
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) |
The accompanying condensed consolidated financial statements of Avista Corporation (Avista Corp. or the Company) for the interim periods ended June 30, 2013 and 2012 are unaudited; however, in the opinion of management, the statements reflect all adjustments necessary for a fair statement of the results for the interim periods. The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The Condensed Consolidated Statements of Income for the interim periods are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements do not contain the detail or footnote disclosure concerning accounting policies and other matters which would be included in full fiscal year consolidated financial statements; therefore, they should be read in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2012 (2012 Form 10-K). Please refer to the section “Acronyms and Terms” in the 2012 Form 10-K for definitions of terms. The acronyms and terms are an integral part of these condensed consolidated financial statements.
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Avista Corporation is an energy company engaged in the generation, transmission and distribution of energy, as well as other energy-related businesses. Avista Utilities is an operating division of Avista Corp., comprising the regulated utility operations. Avista Utilities generates, transmits and distributes electricity in parts of eastern Washington, northern Idaho, and western Montana. In addition, Avista Utilities has electric generating facilities in Montana and northern Oregon. Avista Utilities also provides natural gas distribution service in parts of eastern Washington and northern Idaho, as well as parts of northeastern and southwestern Oregon. Avista Capital, Inc. (Avista Capital), a wholly owned subsidiary of Avista Corp., is the parent company of all of the subsidiary companies in the non-utility businesses, except Spokane Energy, LLC (Spokane Energy). Avista Capital’s subsidiaries include Ecova, Inc. (Ecova), a 79.0 percent owned subsidiary as of June 30, 2013. Ecova is a provider of energy efficiency and other facility information and cost management programs and services for multi-site customers and utilities throughout North America. See Note 12 for business segment information.
Basis of Reporting
The condensed consolidated financial statements include the assets, liabilities, revenues and expenses of the Company and its subsidiaries, including Ecova and other majority owned subsidiaries and variable interest entities for which the Company or its subsidiaries are the primary beneficiaries. Intercompany balances were eliminated in consolidation. The accompanying condensed consolidated financial statements include the Company’s proportionate share of utility plant and related operations resulting from its interests in jointly owned plants.
Taxes Other Than Income Taxes
Taxes other than income taxes include state excise taxes, city occupational and franchise taxes, real and personal property taxes and certain other taxes not based on net income. These taxes are generally based on revenues or the value of property. Utility related taxes collected from customers (primarily state excise taxes and city utility taxes) are recorded as operating revenue and expense and totaled the following amounts for the three and six months ended June 30 (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Utility taxes | $ | 12,238 |
| | $ | 12,777 |
| | $ | 30,144 |
| | $ | 30,612 |
|
Other Income-Net
Other Income-net consisted of the following items for the three and six months ended June 30 (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Interest income | $ | (238 | ) | | $ | (363 | ) | | $ | (496 | ) | | $ | (638 | ) |
Interest income on regulatory deferrals | (8 | ) | | (16 | ) | | (21 | ) | | (24 | ) |
Equity-related AFUDC | (1,355 | ) | | (905 | ) | | (2,746 | ) | | (1,748 | ) |
Net (gain) loss on investments | (154 | ) | | 88 |
| | 244 |
| | 527 |
|
Other income (1) | (681 | ) | | (405 | ) | | (1,562 | ) | | (1,427 | ) |
Total (1) | $ | (2,436 | ) | | $ | (1,601 | ) | | $ | (4,581 | ) | | $ | (3,310 | ) |
| |
(1) | The 2012 amount includes a correction of an immaterial error related to the reclassification of certain operating expenses from other expense-net to utility and non-utility other operating expenses and utility taxes other than income taxes. This correction did not have an impact on net income or earnings per share. See further discussion of this reclassification below under "Correction of an Immaterial Error." |
Materials and Supplies, Fuel Stock and Natural Gas Stored
Inventories of materials and supplies, fuel stock and natural gas stored are recorded at average cost for our regulated operations and the lower of cost or market for our non-regulated operations and consisted of the following as of June 30, 2013 and December 31, 2012 (dollars in thousands):
|
| | | | | | | |
| June 30, | | December 31, |
| 2013 | | 2012 |
Materials and supplies | $ | 29,297 |
| | $ | 26,058 |
|
Fuel stock | 5,131 |
| | 4,121 |
|
Natural gas stored | 10,894 |
| | 17,276 |
|
Total | $ | 45,322 |
| | $ | 47,455 |
|
Investments and Funds Held for Clients and Client Fund Obligations
In connection with the bill paying services, Ecova collects funds from its clients and remits the funds to the appropriate utility or other service provider. Some of the funds collected are invested by Ecova and classified as investments and funds held for clients, and a related liability for client fund obligations is recorded. Investments and funds held for clients include cash and cash equivalent investments, money market funds and investment securities classified as available for sale. Ecova does not invest the funds directly for the clients' benefit; therefore, Ecova bears the risk of loss associated with the investments. Investments and funds held for clients as of June 30, 2013 are as follows (dollars in thousands):
|
| | | | | | | | | | | |
| Amortized Cost (1) | | Unrealized Gain (Loss) | | Fair Value |
Cash and cash equivalents | $ | 18,376 |
| | $ | — |
| | $ | 18,376 |
|
Securities available for sale: | | | | | |
U.S. government agency | 66,453 |
| | (1,841 | ) | | 64,612 |
|
Municipal | 3,562 |
| | 3 |
| | 3,565 |
|
Corporate fixed income – financial | 2,999 |
| | 6 |
| | 3,005 |
|
Corporate fixed income – industrial | 1,761 |
| | 14 |
| | 1,775 |
|
Certificates of deposit | 1,000 |
| | 12 |
| | 1,012 |
|
Total securities available for sale | 75,775 |
| | (1,806 | ) | | 73,969 |
|
Total investments and funds held for clients | $ | 94,151 |
| | $ | (1,806 | ) | | $ | 92,345 |
|
Investments and funds held for clients as of December 31, 2012 are as follows (dollars in thousands):
|
| | | | | | | | | | | |
| Amortized Cost (1) | | Unrealized Gain (Loss) | | Fair Value |
Cash and cash equivalents | $ | 13,867 |
| | $ | — |
| | $ | 13,867 |
|
Money market funds | 15,084 |
| | — |
| | 15,084 |
|
Securities available for sale: | | | | | |
U.S. government agency | 48,340 |
| | 156 |
| | 48,496 |
|
Municipal | 820 |
| | 28 |
| | 848 |
|
Corporate fixed income – financial | 5,010 |
| | 16 |
| | 5,026 |
|
Corporate fixed income – industrial | 3,887 |
| | 49 |
| | 3,936 |
|
Certificates of deposit | 1,000 |
| | 15 |
| | 1,015 |
|
Total securities available for sale | 59,057 |
| | 264 |
| | 59,321 |
|
Total investments and funds held for clients | $ | 88,008 |
| | $ | 264 |
| | $ | 88,272 |
|
| |
(1) | Amortized cost represents the original purchase price of the investments, plus or minus any amortized purchase premiums or accreted purchase discounts. |
Investments and funds held for clients are classified as a current asset since these funds are held for the purpose of satisfying the client fund obligations. Approximately 95 percent and 97 percent of the investment portfolio is rated AA-, Aa3 and higher as of June 30, 2013 and December 31, 2012, respectively, by nationally recognized statistical rating organizations. All fixed income securities were rated as investment grade as of June 30, 2013 and December 31, 2012.
Ecova reviews its investments continuously for indicators of other-than-temporary impairment. To make this determination, Ecova employs a methodology that considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, Ecova evaluates, among other factors, general market conditions, credit quality of instrument issuers, the length of time and extent to which the fair value is less than cost, and whether it has plans to sell the security or it is more-likely-than not that Ecova will be required to sell the security before recovery. Ecova also considers specific adverse conditions related to the financial health of and specific prospects for the issuer as well as other cash flow factors. Once a decline in fair value is determined to be other-than-temporary, an impairment charge is recorded in earnings and a new cost basis in the investment is established. Based on Ecova’s analysis, securities available for sale do not meet the criteria for other-than-temporary impairment as of June 30, 2013 or December 31, 2012.
Proceeds from sales, maturities and calls of securities available for sale were $8.1 million and $44.5 million, for the three months ended June 30, 2013 and June 30, 2012, respectively. Gross realized gains were negligible for the three months ended June 30, 2013 and June 30, 2012. There were not any gross realized losses during these periods. Proceeds from sales, maturities and calls of securities available for sale were $15.1 million and $71.5 million, for the six months ended June 30, 2013 and June 30, 2012, respectively. Gross realized gains were negligible for the six months ended June 30, 2013 and June 30, 2012. There were not any gross realized losses during these periods.
Contractual maturities of securities available for sale as of June 30, 2013 and December 31, 2012 are as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Due within 1 year | | After 1 but within 5 years | | After 5 but within 10 years | | After 10 years | | Total |
June 30, 2013 | $ | 4,614 |
| | $ | 16,637 |
| | $ | 49,816 |
| | $ | 2,902 |
| | $ | 73,969 |
|
December 31, 2012 | 3,047 |
| | 11,786 |
| | 41,485 |
| | 3,003 |
| | 59,321 |
|
Actual maturities may differ due to call or prepayment rights and the effective maturity was 4.2 years as of June 30, 2013 and 1.9 years as of December 31, 2012.
Goodwill
Goodwill arising from acquisitions represents the excess of the purchase price over the estimated fair value of net assets acquired. The Company evaluates goodwill for impairment using a discounted cash flow model on at least an annual basis or more frequently if impairment indicators arise. The Company completed its annual evaluation of goodwill for potential impairment as of December 31, 2012 for Ecova and as of November 30, 2012 for the other businesses and determined that goodwill was not impaired at that time.
The changes in the carrying amount of goodwill are as follows (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| Ecova | | Other | | Accumulated Impairment Losses | | Total |
Balance as of December 31, 2012 | $ | 70,713 |
| | $ | 12,979 |
| | $ | (7,733 | ) | | $ | 75,959 |
|
Adjustments | 803 |
| | — |
| | — |
| | 803 |
|
Balance as of June 30, 2013 | $ | 71,516 |
| | $ | 12,979 |
| | $ | (7,733 | ) | | $ | 76,762 |
|
Accumulated impairment losses are attributable to the other businesses. The adjustment to goodwill recorded represents a purchase accounting adjustment for Ecova's acquisition of LPB based upon final review of the fair market value of the noncontrolling interests associated with a portion of the LPB business and based on review of the fair market value of the client relationship intangible asset.
Intangible Assets
Amortization expense related to Intangible Assets was as follows for the three and six months ended June 30 (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
Intangible asset amortization | $ | 3,098 |
| | $ | 2,558 |
| | $ | 5,677 |
| | $ | 4,655 |
|
The following table details the estimated amortization expense related to Intangible Assets for each of the five years ending December 31 (dollars in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
Estimated amortization expense | $ | 4,961 |
| | $ | 10,180 |
| | $ | 8,204 |
| | $ | 7,087 |
| | $ | 6,193 |
|
The gross carrying amount and accumulated amortization of Intangible Assets as of June 30, 2013 and December 31, 2012 are as follows (dollars in thousands):
|
| | | | | | | | | |
| Estimated | | June 30, | | December 31, |
| Useful Lives | | 2013 | | 2012 |
Client backlog and relationships | 6 - 12 years | | $ | 33,559 |
| | $ | 32,059 |
|
Software development costs | 3 - 5 years | | 36,815 |
| | 33,990 |
|
Other | 1 - 12 years | | 3,343 |
| | 6,237 |
|
Total intangible assets | | | 73,717 |
| | 72,286 |
|
Client relationships accumulated amortization | | | (10,177 | ) | | (7,793 | ) |
Software development costs accumulated amortization | | | (19,024 | ) | | (16,557 | ) |
Other accumulated amortization | | | (2,059 | ) | | (1,680 | ) |
Total accumulated amortization | | | (31,260 | ) | | (26,030 | ) |
Total intangible assets - net | | | $ | 42,457 |
| | $ | 46,256 |
|
Of the total net intangible assets above, intangible assets associated with Ecova represent approximately $41.7 million and $45.4 million at June 30, 2013 and December 31, 2012, respectively.
Derivative Assets and Liabilities
Derivatives are recorded as either assets or liabilities on the Condensed Consolidated Balance Sheets measured at estimated fair value. In certain defined conditions, a derivative may be specifically designated as a hedge for a particular exposure. The accounting for any particular derivative depends on the intended use of that derivative and the resulting designation.
The Washington Utilities and Transportation Commission (UTC) and the Idaho Public Utilities Commission (IPUC) issued accounting orders authorizing Avista Utilities to offset commodity derivative assets or liabilities with a regulatory asset or liability. This accounting treatment is intended to defer the recognition of mark-to-market gains and losses on energy commodity transactions until the period of settlement. The orders provide for Avista Utilities to not recognize the unrealized gain or loss on utility derivative commodity instruments in the Condensed Consolidated Statements of Income. Realized gains or losses are recognized in the period of settlement, subject to approval for recovery through retail rates. Realized gains and losses, subject to regulatory approval, result in adjustments to retail rates through purchased gas cost adjustments, the Energy Recovery Mechanism (ERM) in Washington, the Power Cost Adjustment (PCA) mechanism in Idaho, and periodic general rates cases. Regulatory assets are assessed regularly and are probable for recovery through future rates.
Substantially all forward contracts to purchase or sell power and natural gas are recorded as derivative assets or liabilities at estimated fair value with an offsetting regulatory asset or liability. Contracts that are not considered derivatives are accounted for on the accrual basis until they are settled or realized, unless there is a decline in the fair value of the contract that is determined to be other-than-temporary.
Fair Value Measurements
Fair value represents the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. Energy commodity derivative assets and liabilities, investments and funds held for clients, deferred compensation assets, as well as derivatives related to interest rate swap
agreements and foreign currency exchange contracts, are reported at estimated fair value on the Condensed Consolidated Balance Sheets. See Note 9 for the Company’s fair value disclosures.
Regulatory Deferred Charges and Credits
The Company prepares its condensed consolidated financial statements in accordance with regulatory accounting practices because:
| |
• | rates for regulated services are established by or subject to approval by independent third-party regulators, |
| |
• | the regulated rates are designed to recover the cost of providing the regulated services, and |
| |
• | in view of demand for the regulated services and the level of competition, it is reasonable to assume that rates can be charged to and collected from customers at levels that will recover costs. |
Regulatory accounting practices require that certain costs and/or obligations (such as incurred power and natural gas costs not currently included in rates, but expected to be recovered or refunded in the future) are reflected as deferred charges or credits on the Condensed Consolidated Balance Sheets. These costs and/or obligations are not reflected in the Condensed Consolidated Statements of Income until the period during which matching revenues are recognized. If at some point in the future the Company determines that it no longer meets the criteria for continued application of regulatory accounting practices for all or a portion of its regulated operations, the Company could be:
| |
• | required to write off its regulatory assets, and |
| |
• | precluded from the future deferral of costs not recovered through rates at the time such costs are incurred, even if the Company expected to recover such costs in the future. |
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss, net of tax, consisted of the following as of June 30, 2013 and December 31, 2012 (dollars in thousands):
|
| | | | | | | |
| June 30, | | December 31, |
| 2013 | | 2012 |
Unfunded benefit obligation for pensions and other postretirement benefit plans - net of taxes of $(3,500) and $(3,698), respectively | $ | (6,500 | ) | | $ | (6,867 | ) |
Unrealized gain (loss) on securities available for sale - net of taxes of $(668) and $99, respectively | (1,136 | ) | | 167 |
|
Total accumulated other comprehensive loss | $ | (7,636 | ) | | $ | (6,700 | ) |
The following table details the reclassifications out of accumulated other comprehensive loss by component for the three and six months ended June 30, 2013 (dollars in thousands):
|
| | | | | | | | | | |
| | Amounts Reclassified from Accumulated Other Comprehensive Loss | | |
Details about Accumulated Other Comprehensive Loss Components | | Three Months Ended June 30, 2013 | | Six Months Ended June 30, 2013 | | Affected Line Item in Statement of Income |
Realized gains on investment securities | | $ | 16 |
| | $ | 18 |
| | Other income-net |
| | 16 |
| | 18 |
| | Total before tax |
| | (6 | ) | | (7 | ) | | Tax expense |
| | $ | 10 |
| | $ | 11 |
| | Net of tax |
Amortization of defined benefit pension items | | | | | | |
Amortization of net loss | | $ | (4,891 | ) | | $ | (9,782 | ) | | (a) |
Adjustment due to effects of regulation | | 4,609 |
| | 9,217 |
| | (a) |
| | (282 | ) | | (565 | ) | | Total before tax |
| | 99 |
| | 198 |
| | Tax benefit |
| | $ | (183 | ) | | $ | (367 | ) | | Net of tax |
| |
(a) | These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see Note 6 for additional details). |
Contingencies
The Company has unresolved regulatory, legal and tax issues which have inherently uncertain outcomes. The Company accrues a loss contingency if it is probable that a liability has been incurred and the amount of the loss or impairment can be reasonably estimated. The Company also discloses losses that do not meet these conditions for accrual, if there is a reasonable possibility that a loss may be incurred.
Voluntary Severance Incentive Program
At December 31, 2012, the Company accrued total severance costs of $7.3 million (pre-tax) related to the voluntary termination of 55 employees. The total severance costs were made up of the severance payments and the related payroll taxes and employee benefit costs. All terminations under the voluntary severance incentive program were completed by December 31, 2012. The cost of the program was recognized as expense during the fourth quarter of 2012 and severance pay was distributed in a single lump sum cash payment to each participant during January 2013. As of June 30, 2013, there was no remaining liability accrued.
Correction of an Immaterial Error
Subsequent to the issuance of the Company's condensed consolidated financial statements for the three and six months ended June 30, 2012, the Company's management identified certain employee-related operating expenses, dues and donations, and other operating expenses totaling $2.3 million and $4.6 million for the three and six months ended June 30, 2012, respectively, which had been erroneously included in “Other expense-net” in the previously issued financial statements rather than as a reduction to “Income from operations.” Accordingly, such classification has been corrected in the accompanying Condensed Consolidated Statements of Income for the three and six months ended June 30, 2012 by including these costs within “Other” operating expenses. The restated items are also reflected in the information presented in Note 12, Information by Business Segments. Such items had no effect on net income or earnings per share.
Reclassifications
Certain prior year amounts on the Company's Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Cash Flows have been reclassified to conform to the current year presentation. In the current year Condensed Consolidated Statements of Income, Ecova operating revenues and operating expenses have been reclassified to separate line items. Previously, such amounts had been classified within the line items captioned "Other non-utility revenues" and “Other non-utility operating expenses,” respectively. Also, see Note 1, “Other Income-Net” concerning a corrective reclassification made to certain 2012 operating expenses. In the current year Condensed Consolidated Statements of Cash Flows, "Amortization of investment in exchange power," "Stock-based compensation expense," "Pension and other postretirement benefit expense" and "Amortization of Spokane Energy contract" have been added as their own line items. These were previously included in "Other" in the operating activities section.
NOTE 2. NEW ACCOUNTING STANDARDS
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This ASU does not change current requirements for reporting net income or other comprehensive income in financial statements; however, it requires entities to disclose the effect on the line items of net income for reclassifications out of accumulated other comprehensive income if the item being reclassified is required to be reclassified in its entirety to net income under U.S. GAAP. For other items that are not required to be reclassified in their entirety to net income under U.S. GAAP, an entity is required to cross-reference other disclosures required under U.S. GAAP to provide additional detail about those items. The Company adopted this ASU effective January 1, 2013. The adoption of this ASU required additional disclosures in the Company's financial statements; however, it did not have any impact on the Company's financial condition, results of operations and cash flows.
In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” This ASU enhances disclosure requirements about the nature of an entity's right to offset and related arrangements associated with its financial instruments and derivative instruments. ASU No. 2011-11 requires the disclosure of the gross amounts subject to rights of set off, amounts offset in accordance with the accounting standards followed, and the related net exposure. The Company adopted this ASU effective January 1, 2013. The adoption of this ASU required additional disclosures in the Company's financial statements; however, it did not have any impact on the Company's financial condition, results of operations and cash flows.
In January 2013, the FASB issued ASU No. 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” This ASU clarifies which instruments and transactions are subject to the enhanced disclosure requirements of ASU 2011-11 regarding the offsetting of financial assets and liabilities. ASU No. 2013-01 limits the scope of ASU No. 2011-11 to only recognized derivative instruments, repurchase agreements and reverse repurchase agreements, and borrowing and lending securities transactions that are offset in accordance with either Accounting Standards Codification (ASC) 210-20-45 or ASC 815-10-45. The Company adopted this ASU effective January 1, 2013. The adoption of this ASU did not have any impact on the Company's financial condition, results of operations and cash flows.
NOTE 3. VARIABLE INTEREST ENTITIES
Lancaster Power Purchase Agreement
The Company has a power purchase agreement (PPA) for the purchase of all the output of the Lancaster Plant, a 270 MW natural gas-fired combined cycle combustion turbine plant located in Idaho, owned by an unrelated third-party (Rathdrum Power LLC), through 2026.
Avista Corp. has a variable interest in the PPA. Accordingly, Avista Corp. made an evaluation of which interest holders have the power to direct the activities that most significantly impact the economic performance of the entity and which interest holders have the obligation to absorb losses or receive benefits that could be significant to the entity. Avista Corp. pays a fixed capacity and operations and maintenance payment and certain monthly variable costs under the PPA. Under the terms of the PPA, Avista Corp. makes the dispatch decisions, provides all natural gas fuel and receives all of the electric energy output from the Lancaster Plant. However, Rathdrum Power LLC (the owner) controls the daily operation of the Lancaster Plant and makes operating and maintenance decisions. Rathdrum Power LLC controls all of the rights and obligations of the Lancaster Plant after the expiration of the PPA in 2026. It is estimated that the plant will have 15 to 25 years of useful life after that time. Rathdrum Power LLC bears the maintenance risk of the plant and will receive the residual value of the Lancaster Plant. Avista Corp. has no debt or equity investments in the Lancaster Plant and does not provide financial support through liquidity arrangements or other commitments (other than the PPA). Based on its analysis, Avista Corp. does not consider itself to be the primary beneficiary of the Lancaster Plant. Accordingly, neither the Lancaster Plant nor Rathdrum Power LLC is included in Avista Corp.’s condensed consolidated financial statements. The Company has a future contractual obligation of approximately $309 million under the PPA (representing the fixed capacity and operations and maintenance payments through 2026) and believes this would be its maximum exposure to loss. However, the Company believes that such costs will be recovered through retail rates.
Palouse Wind Power Purchase Agreement
In June 2011, the Company entered into a 30-year PPA with Palouse Wind, LLC (Palouse Wind), an affiliate of First Wind Holdings, LLC. The PPA relates to a wind project that was developed by Palouse Wind in Whitman County, Washington and under the terms of the PPA, the Company acquires all of the power and renewable attributes produced by the wind project for a fixed price per MWh, which escalates annually, without consideration for market fluctuations. The wind project has a nameplate capacity of approximately 105 MW and is expected to produce approximately 40 aMW annually. The project was completed and energy deliveries began during the fourth quarter of 2012. Under the PPA, the Company has an annual option to purchase the wind project following the 10th anniversary of the commercial operation date at a fixed price determined under the contract.
The Company evaluated this agreement to determine if it has a variable interest which must be consolidated. Based on its analysis, Avista Corp. does not consider itself to be the primary beneficiary of the Palouse Wind facility due to the fact that it pays a fixed price per MWh, which represents the only financial obligation, and does not have any input into the management of the day-to-day operations of the facility. Accordingly, Palouse Wind is not included in Avista Corp.’s condensed consolidated financial statements. The Company has a future contractual obligation of approximately $567 million under the PPA (representing the charges associated with purchasing the energy and renewable attributes through 2042) and believes this would be its maximum exposure to loss. However, the Company believes that such costs will be recovered through retail rates.
NOTE 4. REDEEMABLE NONCONTROLLING INTERESTS AND SUBSIDIARY ACQUISITIONS
Certain minority shareholders and option holders of Ecova have the right to put their shares back to Ecova at their discretion during an annual put window. Stock options and other outstanding redeemable stock are valued at their maximum redemption amount which is equal to their intrinsic value (fair value less exercise price).
The following details redeemable noncontrolling interests as of June 30, 2013 and December 31, 2012 (dollars in thousands):
|
| | | | | | | |
| June 30, | | December 31, |
| 2013 | | 2012 |
Stock options and other outstanding redeemable stock | $ | 7,817 |
| | $ | 4,938 |
|
On January 31, 2012, Ecova acquired all of the capital stock of LPB Energy Management (LPB), a Dallas, Texas-based energy management company. The cash paid for the acquisition of LPB of $50.6 million was funded by Ecova through $25.0 million of borrowings under its committed credit agreement, a $20.0 million equity infusion from existing shareholders (including Avista Capital and the other owners of Ecova), and available cash. The acquired assets and assumed liabilities of LPB were recorded at their respective estimated fair values as of the date of acquisition. Assets recorded include the following: accounts receivable of $2.5 million, goodwill of $34.0 million, client backlog of $8.2 million (estimated amortization period of 6 years), client relationships of $6.3 million (estimated amortization period of 6 years) and internal use software of $2.5 million (estimated amortization period of 3 to 5 years). These intangible assets are included in intangible assets on the Condensed Consolidated Balance Sheet. Included in the goodwill amount is $1.1 million attributable to assembled workforce that is deductible and will be amortized for tax purposes over a 15-year period and is subject to impairment review annually. The results of operations of LPB are included in the condensed consolidated financial statements beginning February 1, 2012. The sellers of LPB did not receive additional purchase price payments in 2012; however, they have the potential to receive additional purchase price payments of $1.0 million in 2013 and $1.5 million in 2014. These payments are contingent upon reaching certain revenue thresholds for certain customer contracts. As of June 30, 2013, Ecova has recorded a contingent liability of $0.3 million based on management's assessment of the probability of the revenue thresholds being achieved.
Pro forma disclosures reflecting the effects of Ecova’s acquisition are not presented, as the acquisition is not material to Avista Corp.’s condensed consolidated financial condition or results of operations.
NOTE 5. DERIVATIVES AND RISK MANAGEMENT
Energy Commodity Derivatives
Avista Utilities is exposed to market risks relating to changes in electricity and natural gas commodity prices and certain other fuel prices. Market risk is, in general, the risk of fluctuation in the market price of the commodity being traded and is influenced primarily by supply and demand. Market risk includes the fluctuation in the market price of associated derivative commodity instruments. Avista Utilities utilizes derivative instruments, such as forwards, futures, swaps and options in order to manage the various risks relating to these commodity price exposures. The Company has an energy resources risk policy and control procedures to manage these risks. The Company’s Risk Management Committee establishes the Company’s energy resources risk policy and monitors compliance. The Risk Management Committee is comprised of certain Company officers and other members of management. The Audit Committee of the Company’s Board of Directors periodically reviews and discusses enterprise risk management processes, and it focuses on the Company’s material financial and accounting risk exposures and the steps management has undertaken to control them.
As part of our resource procurement and management operations in the electric business, we engage in an ongoing process of resource optimization, which involves the economic selection from available energy resources to serve our load obligations and the use of these resources to capture available economic value. We transact in wholesale markets by selling and purchasing electric capacity and energy, fuel for electric generation, and derivative contracts related to capacity, energy and fuel. Such transactions are part of the process of matching resources with our load obligations and hedging the related financial risks. These transactions range from terms of intra-hour up to multiple years.
Avista Utilities makes continuing projections of:
| |
• | electric loads at various points in time (ranging from intra-hour to multiple years) based on, among other things, estimates of customer usage and weather, historical data and contract terms, and |
| |
• | resource availability at these points in time based on, among other things, fuel choices and fuel markets, estimates of streamflows, availability of generating units, historic and forward market information, contract terms, and experience. |
On the basis of these projections, we make purchases and sales of electric capacity and energy, fuel for electric generation, and related derivative instruments to match expected resources to expected electric load requirements and reduce our exposure to electricity (or fuel) market price changes. Resource optimization involves generating plant dispatch and scheduling available resources and also includes transactions such as:
| |
• | purchasing fuel for generation, |
| |
• | when economical, selling fuel and substituting wholesale electric purchases, and |
| |
• | other wholesale transactions to capture the value of generation and transmission resources and fuel delivery capacity contracts. |
Avista Utilities’ optimization process includes entering into hedging transactions to manage risks. Transactions include both physical energy contracts and related derivative instruments.
As part of its resource procurement and management of its natural gas business, Avista Utilities makes continuing projections of its natural gas loads and assesses available natural gas resources including natural gas storage availability. Natural gas resource planning typically includes peak requirements, low and average monthly requirements and delivery constraints from natural gas supply locations to Avista Utilities’ distribution system. However, daily variations in natural gas demand can be significantly different than monthly demand projections. On the basis of these projections, Avista Utilities plans and executes a series of transactions to hedge a significant portion of its projected natural gas requirements through forward market transactions and derivative instruments. These transactions may extend as much as four natural gas operating years (November through October) into the future. Avista Utilities also leaves a significant portion of its natural gas supply requirements unhedged for purchase in short-term and spot markets.
Natural gas resource optimization activities include:
| |
• | wholesale market sales of surplus natural gas supplies, |
| |
• | optimization of interstate pipeline transportation capacity not needed to serve daily load, and |
| |
• | purchases and sales of natural gas to optimize use of storage capacity. |
The following table presents the underlying energy commodity derivative volumes as of June 30, 2013 that are expected to settle in each respective year (in thousands of MWhs and mmBTUs):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Purchases | | Sales |
| Electric Derivatives | | Gas Derivatives | | Electric Derivatives | | Gas Derivatives |
Year | Physical (1) MWH | | Financial (1) MWH | | Physical (1) mmBTUs | | Financial (1) mmBTUs | | Physical MWH | | Financial MWH | | Physical mmBTUs | | Financial mmBTUs |
2013 | 555 |
| | 1,923 |
| | 13,910 |
| | 61,099 |
| | 270 |
| | 2,164 |
| | 1,973 |
| | 45,646 |
|
2014 | 620 |
| | 1,323 |
| | 6,808 |
| | 84,332 |
| | 377 |
| | 2,599 |
| | 1,786 |
| | 53,263 |
|
2015 | 379 |
| | 982 |
| | 3,768 |
| | 55,920 |
| | 254 |
| | 1,463 |
| | — |
| | 46,840 |
|
2016 | 367 |
| | — |
| | 1,745 |
| | 23,960 |
| | 287 |
| | 675 |
| | — |
| | 13,380 |
|
2017 | 366 |
| | — |
| | 225 |
| | — |
| | 286 |
| | — |
| | — |
| | — |
|
Thereafter | 583 |
| | — |
| | — |
| | — |
| | 443 |
| | — |
| | — |
| | — |
|
| |
(1) | Physical transactions represent commodity transactions where Avista Utilities will take delivery of either electricity or natural gas and financial transactions represent derivative instruments with no physical delivery, such as futures, swaps or options. |
The above electric and natural gas derivative contracts will be included in either power supply costs or natural gas supply costs during the period they settle and will be included in the various recovery mechanisms (ERM, PCA, and PGAs), or in the general rate case process, and are expected to be collected through retail rates from customers.
Foreign Currency Exchange Contracts
A significant portion of Avista Utilities’ natural gas supply (including fuel for power generation) is obtained from Canadian sources. Most of those transactions are executed in U.S. dollars, which avoids foreign currency risk. A portion of Avista Utilities’ short-term natural gas transactions and long-term Canadian transportation contracts are committed based on Canadian currency prices and settled within sixty days with U.S. dollars. Avista Utilities hedges a portion of the foreign currency risk by purchasing Canadian currency contracts when such commodity transactions are initiated. This risk has not had a material effect on the Company’s financial condition, results of operations or cash flows and these differences in cost related to currency fluctuations were included with natural gas supply costs for ratemaking.
The following table summarizes the foreign currency hedges that the Company has entered into as of June 30, 2013 and December 31, 2012 (dollars in thousands):
|
| | | | | | | |
| June 30, | | December 31, |
| 2013 | | 2012 |
Number of contracts | 26 |
| | 20 |
|
Notional amount (in United States dollars) | $ | 7,682 |
| | $ | 12,621 |
|
Notional amount (in Canadian dollars) | 7,938 |
| | 12,502 |
|
Interest Rate Swap Agreements
Avista Corp. hedges a portion of its interest rate risk with financial derivative instruments, which may include interest rate swaps and U.S. Treasury lock agreements. These interest rate swap agreements are considered economic hedges against fluctuations in future cash flows associated with anticipated debt issuances.
The following table summarizes the interest rate swaps that the Company has entered into as of June 30, 2013 and December 31, 2012 (dollars in thousands):
|
| | | | | | | |
| June 30, | | December 31, |
| 2013 | | 2012 |
Number of contracts | — |
| | 2 |
|
Notional amount | — |
| | $ | 85,000 |
|
Mandatory cash settlement date | — |
| | June 2013 |
|
Number of contracts | 2 |
| | 2 |
|
Notional amount | $ | 50,000 |
| | $ | 50,000 |
|
Mandatory cash settlement date | October 2014 |
| | October 2014 |
|
Number of contracts | 2 |
| | 1 |
|
Notional amount | $ | 45,000 |
| | $ | 25,000 |
|
Mandatory cash settlement date | October 2015 |
| | October 2015 |
|
Number of contracts | 1 |
| | — |
|
Notional amount | $ | 20,000 |
| | — |
|
Mandatory cash settlement date | October 2016 |
| | — |
|
In June 2013, the Company cash settled two interest rate swap contracts (notional amount of $85.0 million) and received a total of $2.9 million. The interest rate swap contracts were settled in connection with the pricing of $90.0 million of First Mortgage Bonds that is expected to occur during August 2013 (see Note 8). Upon settlement of the interest rate swaps, the regulatory asset or liability (included as part of long-term debt) is amortized as a component of interest expense over the life of the associated debt.
Derivative Instruments Summary
The following table presents the fair values and locations of derivative instruments recorded on the Condensed Consolidated Balance Sheet as of June 30, 2013 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value |
Derivative | | Balance Sheet Location | | Gross Asset | | Gross Liability | | Collateral Netting | | Net Asset (Liability) in Balance Sheet | | Gross Assets Not Offset | | Gross Liabilities Not Offset | | Net Asset (Liability) |
Foreign currency contracts | | Other current liabilities | | $ | 1 |
| | $ | (135 | ) | | $ | — |
| | $ | (134 | ) | | $ | — |
| | $ | — |
| | $ | (134 | ) |
Interest rate contracts | | Other property and investments - net | | 21,120 |
| | — |
| | — |
| | 21,120 |
| | — |
| | — |
| | 21,120 |
|
Commodity contracts (1) | | Current utility energy commodity derivative assets | | 2,840 |
| | (590 | ) | | — |
| | 2,250 |
| | — |
| | — |
| | 2,250 |
|
Commodity contracts (1) | | Non-current utility energy commodity derivative assets | | 615 |
| | (480 | ) | | — |
| | 135 |
| | — |
| | — |
| | 135 |
|
Commodity contracts (1) | | Current utility energy commodity derivative liabilities | | 36,517 |
| | (66,639 | ) | | 7,749 |
| | (22,373 | ) | | — |
| | — |
| | (22,373 | ) |
Commodity contracts (1) | | Other non-current liabilities and deferred credits | | 23,977 |
| | (55,700 | ) | | 6,481 |
| | (25,242 | ) | | — |
| | — |
| | (25,242 | ) |
Total derivative instruments recorded on the balance sheet | | $ | 85,070 |
| | $ | (123,544 | ) | | $ | 14,230 |
| | $ | (24,244 | ) | | $ | — |
| | $ | — |
| | $ | (24,244 | ) |
The following table presents the fair values and locations of derivative instruments recorded on the Condensed Consolidated Balance Sheet as of December 31, 2012 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value |
Derivative | | Balance Sheet Location | | Gross Asset | | Gross Liability | | Collateral Netting | | Net Asset (Liability) in Balance Sheet | | Gross Assets Not Offset | | Gross Liabilities Not Offset | | Net Asset (Liability) |
Foreign currency contracts | | Other current liabilities | | $ | 7 |
| | $ | (34 | ) | | $ | — |
| | $ | (27 | ) | | $ | — |
| | $ | — |
| | $ | (27 | ) |
Interest rate contracts | | Other current liabilities | | — |
| | (1,406 | ) | | — |
| | (1,406 | ) | | — |
| | — |
| | (1,406 | ) |
Interest rate contracts | | Other property and investments - net | | 7,265 |
| | — |
| | — |
| | 7,265 |
| | — |
| | — |
| | 7,265 |
|
Commodity contracts (1) | | Current utility energy commodity derivative assets | | 10,772 |
| | (6,633 | ) | | — |
| | 4,139 |
| | (9,678 | ) | | 6,572 |
| | 1,033 |
|
Commodity contracts (1) | | Non-current utility energy commodity derivative assets | | 18,779 |
| | (17,686 | ) | | — |
| | 1,093 |
| | — |
| | — |
| | 1,093 |
|
Commodity contracts (1) | | Current utility energy commodity derivative liabilities | | 50,227 |
| | (89,449 | ) | | 9,707 |
| | (29,515 | ) | | 9,678 |
| | (6,572 | ) | | (26,409 | ) |
Commodity contracts (1) | | Other non-current liabilities and deferred credits | | 2,247 |
| | (28,558 | ) | | — |
| | (26,311 | ) | | — |
| | — |
| | (26,311 | ) |
Total derivative instruments recorded on the balance sheet | | $ | 89,297 |
| | $ | (143,766 | ) | | $ | 9,707 |
| | $ | (44,762 | ) | | $ | — |
| | $ | — |
| | $ | (44,762 | ) |
| |
(1) | Avista Corp. has a master netting agreement that governs the transactions of multiple affiliated legal entities under this single master netting agreement. This master netting agreement allows for cross-commodity netting (i.e. netting physical power, physical natural gas, and financial transactions) and cross-affiliate netting for the parties to the agreement. Avista Corp. performs cross-commodity netting for each legal entity that is a party to the master netting agreement for presentation in the Condensed Consolidated Balance Sheets; however, Avista Corp. does not perform cross-affiliate netting because the Company believes that cross-affiliate netting may not be enforceable. Therefore, the requirements for cross-affiliate netting under ASC 210-20-45 are not applicable for Avista Corp. As of June 30, 2013, the gross assets and gross liabilities which were not netted under this master netting agreement were negligible. |
Exposure to Demands for Collateral
The Company's derivative contracts often require collateral (in the form of cash or letters of credit) or other credit enhancements, or reductions or terminations of a portion of the contract through cash settlement in the event of a downgrade in the Company's credit ratings or changes in market prices. In periods of price volatility, the level of exposure can change significantly. As a result, sudden and significant demands may be made against the Company's credit facilities and cash. The Company actively monitors the exposure to possible collateral calls and takes steps to mitigate capital requirements. As of June 30, 2013, the Company had cash deposited as collateral of $24.5 million and letters of credit of $22.1 million outstanding related to its energy derivative contracts. The Condensed Consolidated Balance Sheet at June 30, 2013 reflects the offsetting of $14.2 million of cash collateral against net derivative positions where a legal right of offset exists.
Certain of the Company’s derivative instruments contain provisions that require the Company to maintain an "investment grade" credit rating from the major credit rating agencies. If the Company’s credit ratings were to fall below “investment grade,” it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position as of June 30, 2013 was $26.5 million. If the credit-risk-related contingent features underlying these agreements were triggered on June 30, 2013, the Company could be required to post $20.6 million of additional collateral to its counterparties.
Credit Risk
Credit risk relates to the potential losses that the Company would incur as a result of non-performance by counterparties of their contractual obligations to deliver energy or make financial settlements. The Company often extends credit to counterparties and customers and is exposed to the risk that it may not be able to collect amounts owed to the Company. Credit risk includes potential counterparty default due to circumstances:
| |
• | relating directly to it, |
| |
• | caused by market price changes, and |
| |
• | relating to other market participants that have a direct or indirect relationship with such counterparty. |
Changes in market prices may dramatically alter the size of credit risk with counterparties, even when conservative credit limits are established. Should a counterparty fail to perform, the Company may be required to honor the underlying commitment or to replace existing contracts with contracts at then-current market prices.
We enter into bilateral transactions between Avista and various counterparties. We also trade energy and related derivative instruments through clearinghouse exchanges.
The Company seeks to mitigate bilateral credit risk by:
| |
• | entering into bilateral contracts that specify credit terms and protections against default, |
| |
• | applying credit limits and duration criteria to existing and prospective counterparties, |
| |
• | actively monitoring current credit exposures, |
| |
• | asserting our collateral rights with counterparties, |
| |
• | carrying out transaction settlements timely and effectively, and |
| |
• | conducting transactions on exchanges with fully collateralized clearing arrangements that significantly reduce counterparty default risk. |
The Company's credit policy includes an evaluation of the financial condition of counterparties. Credit risk management includes collateral requirements or other credit enhancements, such as letters of credit or parent company guarantees. The
Company enters into various agreements that address credit risks including standardized agreements that allow for the netting or offsetting of positive and negative exposures.
The Company has concentrations of suppliers and customers in the electric and natural gas industries including:
| |
• | electric and natural gas utilities, |
| |
• | electric generators and transmission providers, |
| |
• | natural gas producers and pipelines, |
| |
• | financial institutions including commodity clearing exchanges and related parties, and |
| |
• | energy marketing and trading companies. |
In addition, the Company has concentrations of credit risk related to geographic location as it operates in the western United States and western Canada. These concentrations of counterparties and concentrations of geographic location may impact the Company’s overall exposure to credit risk because the counterparties may be similarly affected by changes in conditions.
The Company maintains credit support agreements with certain counterparties and margin calls are periodically made and/or received. Margin calls are triggered when exposures exceed contractual limits or when there are changes in a counterparty’s creditworthiness. Price movements in electricity and natural gas can generate exposure levels in excess of these contractual limits. Negotiating for collateral in the form of cash, letters of credit, or performance guarantees is common industry practice.
NOTE 6. PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has a defined benefit pension plan covering substantially all regular full-time employees at Avista Utilities. Individual benefits under this plan are based upon the employee’s years of service, date of hire and average compensation as specified in the plan. The Company’s funding policy is to contribute at least the minimum amounts that are required to be funded under the Employee Retirement Income Security Act, but not more than the maximum amounts that are currently deductible for income tax purposes. The Company contributed $29.3 million in cash to the pension plan for the six months ended June 30, 2013. The Company expects to contribute $44 million in cash to the pension plan in 2013. The Company contributed $44 million in cash to the pension plan in 2012.
The Company also has a Supplemental Executive Retirement Plan (SERP) that provides additional pension benefits to executive officers of the Company. The SERP is intended to provide benefits to executive officers whose benefits under the pension plan are reduced due to the application of Section 415 of the Internal Revenue Code of 1986 and the deferral of salary under deferred compensation plans. The liability and expense for this plan are included as pension benefits in the tables included in this Note.
The Company provides certain health care and life insurance benefits for substantially all of its retired employees. The Company accrues the estimated cost of postretirement benefit obligations during the years that employees provide services.
The Company has a Health Reimbursement Arrangement to provide employees with tax-advantaged funds to pay for allowable medical expenses upon retirement. The amount earned by the employee is fixed on the retirement date based on the employee’s years of service and the ending salary. The liability and expense of this plan are included as other postretirement benefits.
The Company provides death benefits to beneficiaries of executive officers who die during their term of office or after retirement. Under the plan, an executive officer’s designated beneficiary will receive a payment equal to twice the executive officer’s annual base salary at the time of death (or if death occurs after retirement, a payment equal to twice the executive officer’s total annual pension benefit). The liability and expense for this plan are included as other postretirement benefits.
The Company uses a December 31 measurement date for its pension and other postretirement benefit plans. The following table sets forth the components of net periodic benefit costs for the three and six months ended June 30 (dollars in thousands):
|
| | | | | | | | | | | | | | | |
| Pension Benefits | | Other Post-retirement Benefits |
| 2013 | | 2012 | | 2013 | | 2012 |
Three months ended June 30: | | | | | | | |
Service cost | $ | 4,743 |
| | $ | 3,891 |
| | $ | 1,032 |
| | $ | 689 |
|
Interest cost | 5,978 |
| | 6,084 |
| | 1,390 |
| | 1,256 |
|
Expected return on plan assets | (6,900 | ) | | (5,950 | ) | | (400 | ) | | (375 | ) |
Transition obligation recognition | — |
| | — |
| | — |
| | 125 |
|
Amortization of prior service cost | 75 |
| | 75 |
| | (37 | ) | | (37 | ) |
Net loss recognition | 3,222 |
| | 3,021 |
| | 1,426 |
| | 1,252 |
|
Net periodic benefit cost | $ | 7,118 |
| | $ | 7,121 |
| | $ | 3,411 |
| | $ | 2,910 |
|
Six months ended June 30: | | | | | | | |
Service cost | $ | 9,486 |
| | $ | 7,682 |
| | $ | 2,064 |
| | $ | 1,378 |
|
Interest cost | 11,956 |
| | 12,193 |
| | 2,780 |
| | 2,537 |
|
Expected return on plan assets | (13,800 | ) | | (11,950 | ) | | (800 | ) | | (750 | ) |
Transition obligation recognition | — |
| | — |
| | — |
| | 250 |
|
Amortization of prior service cost | 150 |
| | 150 |
| | (74 | ) | | (74 | ) |
Net loss recognition | 6,769 |
| | 5,778 |
| | 2,947 |
| | 2,564 |
|
Net periodic benefit cost | $ | 14,561 |
| | $ | 13,853 |
| | $ | 6,917 |
| | $ | 5,905 |
|
NOTE 7. COMMITTED LINES OF CREDIT
Avista Corp.
Avista Corp. has a committed line of credit with various financial institutions in the total amount of $400 million with an expiration date of February 2017. The committed line of credit is secured by non-transferable First Mortgage Bonds of the Company issued to the agent bank that would only become due and payable in the event, and then only to the extent, that the Company defaults on its obligations under the committed line of credit.
The committed line of credit agreement contains customary covenants and default provisions. The credit agreement has a covenant which does not permit the ratio of “consolidated total debt” to “consolidated total capitalization” of Avista Corp. to be greater than 65 percent at any time. As of June 30, 2013, the Company was in compliance with this covenant.
Balances outstanding and interest rates of borrowings under the Company’s revolving committed line of credit were as follows as of June 30, 2013 and December 31, 2012 (dollars in thousands):
|
| | | | | | | |
| June 30, | | December 31, |
| 2013 | | 2012 |
Borrowings outstanding at end of period | $ | 95,500 |
| | $ | 52,000 |
|
Letters of credit outstanding at end of period | $ | 24,078 |
| | $ | 35,885 |
|
Average interest rate on borrowings at end of period | 1.11 | % | | 1.12 | % |
As of June 30, 2013 the borrowings outstanding under Avista Corp.'s committed line of credit were classified as short-term borrowings on the Condensed Consolidated Balance Sheet.
Ecova
Ecova has a $125.0 million committed line of credit agreement with various financial institutions that has an expiration date of July 2017. The credit agreement is secured by all of Ecova's assets excluding investments and funds held for clients.
The committed line of credit agreement contains customary covenants and default provisions, including a covenant which requires that Ecova's “Consolidated Total Funded Debt to EBITDA Ratio” (as defined in the credit agreement) must be 2.50 to 1.00 or less, with provisions in the credit agreement allowing for a temporary increase of this ratio if a qualified acquisition is consummated by Ecova. In addition, Ecova's “Consolidated Fixed Charge Coverage Ratio” (as defined in the credit agreement) must be greater than 1.50 to 1.00 as of the last day of any fiscal quarter. As of June 30, 2013, Ecova was in compliance with these covenants.
Balances outstanding and interest rates of borrowings under Ecova’s credit agreements were as follows as of June 30, 2013 and December 31, 2012 (dollars in thousands):
|
| | | | | | | |
| June 30, | | December 31, |
| 2013 | | 2012 |
Borrowings outstanding at end of period | $ | 52,000 |
| | $ | 54,000 |
|
Average interest rate on borrowings at end of period | 2.20 | % | | 2.21 | % |
As of June 30, 2013 the borrowings outstanding under Ecova's committed line of credit were classified as long-term borrowings under committed line of credit on the Condensed Consolidated Balance Sheet.
NOTE 8. LONG-TERM DEBT
The following details long-term debt outstanding as of June 30, 2013 and December 31, 2012 (dollars in thousands):
|
| | | | | | | | | | | | |
Maturity | | | | Interest | | June 30, | | December 31, |
Year | | Description | | Rate | | 2013 | | 2012 |
2013 | | First Mortgage Bonds | | 1.68% | | $ | 50,000 |
| | $ | 50,000 |
|
2018 | | First Mortgage Bonds | | 5.95% | | 250,000 |
| | 250,000 |
|
2018 | | Secured Medium-Term Notes | | 7.39%-7.45% | | 22,500 |
| | 22,500 |
|
2019 | | First Mortgage Bonds | | 5.45% | | 90,000 |
| | 90,000 |
|
2020 | | First Mortgage Bonds | | 3.89% | | 52,000 |
| | 52,000 |
|
2022 | | First Mortgage Bonds | | 5.13% | | 250,000 |
| | 250,000 |
|
2023 | | Secured Medium-Term Notes | | 7.18%-7.54% | | 13,500 |
| | 13,500 |
|
2028 | | Secured Medium-Term Notes | | 6.37% | | 25,000 |
| | 25,000 |
|
2032 | | Secured Pollution Control Bonds (1) | | (1) | | 66,700 |
| | 66,700 |
|
2034 | | Secured Pollution Control Bonds (2) | | (2) | | 17,000 |
| | 17,000 |
|
2035 | | First Mortgage Bonds | | 6.25% | | 150,000 |
| | 150,000 |
|
2037 | | First Mortgage Bonds | | 5.70% | | 150,000 |
| | 150,000 |
|
2040 | | First Mortgage Bonds | | 5.55% | | 35,000 |
| | 35,000 |
|
2041 | | First Mortgage Bonds | | 4.45% | | 85,000 |
| | 85,000 |
|
2047 | | First Mortgage Bonds | | 4.23% | | 80,000 |
| | 80,000 |
|
| | Total secured long-term debt | | | | 1,336,700 |
| | 1,336,700 |
|
| | Other long-term debt and capital leases | | | | 4,733 |
| | 5,092 |
|
| | Settled interest rate swaps (3) | | | | (24,118 | ) | | (27,900 | ) |
| | Unamortized debt discount | | | | (1,370 | ) | | |