AVISTA CORPORATION Management's Discussion and Analysis of Financial Condition and Results of Operations has been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q. The interim Management's Discussion and Analysis of Financial Condition and Results of Operations does not contain the full detail or analysis which would be included in a full fiscal year Form 10-K; therefore, it should be read in conjunction with the Company's 2019 Form 10-K. Business Segments Our business segments have not changed during the nine months endedSeptember 30, 2020 . See the 2019 Form 10-K as well as "Note 17 of the Notes to Condensed Consolidated Financial Statements" for further information regarding our business segments.
The following table presents net income attributable to
Three months ended September 30, Nine months ended September 30,
2020 2019 2020 2019
Avista Utilities $ 5,546 $ 5,966 $ 69,130 $ 139,086
AEL&P 268 197 4,991 4,825
Other (938 ) (1,073 ) (3,368 ) 2,292
Net income attributable to Avista Corp.
shareholders $ 4,876 $ 5,090 $ 70,753 $ 146,203
Executive Level Summary
Overall Results
Net income attributable to Avista Corp. shareholders was $4.9 million for the
three months ended September 30, 2020 , compared to $5.1 million for the three
months ended September 30, 2019 . Net income was $70.8 million for the nine
months ended September 30, 2020 , compared to $146.2 million for the nine months
ended September 30, 2019 .
Avista Utilities' net income for the three and nine months ended September 30,
2020 decreased compared to the three and nine months ended September 30, 2019 .
For the third quarter, our earnings decreased due to higher operating expenses,
primarily from increased bad debt, and decreased loads resulting from COVID-19,
which was partially offset by higher utility margin due to lower power supply
costs, rate relief in Washington and Oregon , and customer growth. For the
year-to-date, earnings were lower than in 2019 primarily due to the receipt, in
the first quarter of 2019, of a $103 million termination fee from Hydro One (see
"Note 18 of the Notes to Condensed Consolidated Financial Statements") which was
partially offset by associated expenses of $19.7 million pre-tax. In addition,
in the first nine months of 2020, we recorded an accrual for customer refunds
related to the outcome of the 2015 Washington general rate cases outcome (see
"Regulatory Matters"), an accrual for disallowed replacement power during an
unplanned outage at Colstrip (see "Regulatory Matters"). For the year-to-date
period, we also had an increase in other operating expenses and depreciation and
amortization, which were partially offset by a decrease in our income tax
expense and resource costs.
AEL&P net income increased slightly, primarily due to higher sales volumes to
residential and commercial customers in 2020 as a result of cooler than usual
weather.
The decrease in net income at our other businesses for the year-to-date was
primarily due to the sale of METALfx in 2019. In addition, we had impairment
losses and the write-off of a note receivable in the first three quarters of
2020, which was partially offset by investment gains associated with our equity
investments.
More detailed explanations of the fluctuations are provided in the results of
operations and business segment discussions (Avista Utilities , AEL&P, and the
other businesses) that follow this section.
39--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION COVID-19 Global Pandemic The COVID-19 global pandemic is currently impacting all aspects of our business, as well as the global, national and local economies. It is likely that the continued spread of COVID-19 and efforts to contain the virus will continue to cause an economic slowdown and possibly a recession, resulting in significant disruptions in various public, commercial or industrial activities and causing employee absences which could interfere with operation and maintenance of the Company's facilities. These circumstances have affected and will likely continue to adversely affect our operations, results of operations, financial condition and cash flows in the following ways:
Operations
We provide critical services to our customers. Accordingly, it is paramount that we keep our employees who operate our business safe so that we continue to provide reliable service. We implemented business continuity plans in the context of this global pandemic. We believe that we will continue to be able to conduct our utility operations effectively and provide safe and reliable service to our customers.
We have taken precautions concerning employee and facility hygiene, imposed travel limitations on employees and directed our employees to work remotely whenever possible. Protocols have been established and implemented to protect employees and the public when work requires public interaction.
During the third quarter of 2020, we continued to experience supply chain delays due to the effects of the COVID-19 pandemic that have impacted the delivery times of some of our materials and equipment, with delays ranging from a couple weeks up to eight weeks in some cases. At this time, the delays are being managed with minimal impact. The issues that could potentially result from future delays are being proactively mitigated through several planning and review activities, but could have an impact on our planned projects going forward. Although we have not experienced any significant issues to date, it is possible that COVID-19 could have a negative impact on the ability of vendors or contractors to perform, which could increase operating costs and delay and/or increase the costs of capital projects.
Results of Operations
In the three months endedSeptember 30, 2020 , when compared to normal, there was a decrease of approximately 2 percent on overall electric load, which consisted of approximately a 6 percent decrease in both commercial and industrial, which was partially offset by an increase of 5 percent in residential. We expect a gradual economic recovery and prolonged high unemployment that will depress load and customer growth into 2021. We have decoupling and other regulatory mechanisms inWashington ,Idaho andOregon , which mitigate the impact of changes in loads and revenues for residential and certain commercial customer classes. There are limitations on increases in decoupling surcharges in a particular year and revenue recognition criteria established by GAAP. Although we expect to ultimately recognize all decoupling revenue, there can be a delay in revenue recognition. Over 90 percent of our utility revenue is covered by regulatory mechanisms. We have suspended customer disconnections and late fees for non-payment; however, inIdaho , the IPUC approved resuming disconnections and late fees. Due to the economic downturn, our bad debt expense increased by$4.7 million in the third quarter and$8.0 million for the nine months endedSeptember 30, 2020 as compared to our original forecast. We expect bad debt expense to increase by an additional$3.5 million for the remainder of 2020 as compared to our original forecast. In the first nine months of 2020, we deferred$2.5 million of the incremental bad debt expense related to ourIdaho operations. We expect to offset some of the negative impacts of COVID-19 atAvista Utilities with cost savings and benefits from the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). We have filed petitions for an accounting order in each of our jurisdictions to defer the recognition of COVID-19 expenses as well as identified cost savings of other COVID-19 related benefits. See "Note 1 of Notes to Condensed Consolidated Financial Statements." 40
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION CARES Act InMarch 2020 , the CARES Act, an economic stimulus package in response to COVID-19, was signed into law. The CARES Act contains corporate income tax provisions, including providing temporary changes regarding the prior and future utilization of net operating losses, temporary suspension of certain payment requirements for the employer portion of social security taxes, and the creation of certain refundable employee retention credits. We expect to be able to utilize$6.6 million ($7.9 million pre-tax) of benefits from the CARES Act to offset increased costs associated with the COVID-19 pandemic. The benefits we expect to utilize are primarily derived from net operating loss carrybacks.
Financial Condition, Liquidity and Cash Flows
For 2020, we expect our net cash flows from operations to decrease primarily due to lower revenues from retail sales of electricity and natural gas and lower payments from customers.
We do not expect the impact of COVID-19 to change our estimate of utility capital expenditures for 2020.
As ofSeptember 30, 2020 , we had$324.4 million of available liquidity under theAvista Corp. $400.0 million committed line of credit and$25.0 million under the AEL&P committed line of credit. InApril 2020 , we entered into a one-year credit agreement with two financial institutions in the amount of$100.0 million . We borrowed the entire$100.0 million available under this agreement. After considering the impacts of COVID-19, including lower net operating cash flows, and the issuances of long-term debt and equity during 2020, we expect net cash flows from operations, together with cash available under our committed lines of credit and the$100.0 million borrowed under the new credit agreement, to provide adequate resources to fund capital expenditures, dividends, and other contractual commitments. In addition to any of the issues identified above, we cannot predict the duration and severity of the COVID-19 global pandemic. The longer and more severe the economic restrictions and business disruption is, the greater the impact on our operations, results of operations, financial condition and cash flows will be.
Executive Order re Securing the United States Bulk Power System
InMay 2020 , the President ofthe United States signed an Executive Order titled "Securing the United States Bulk-Power System." The executive order purports to limit the acquisition, importation, transfer or installation of bulk power system equipment sourced from foreign adversaries. At this time, and pending future rulemaking, the full scope of the order is not yet known. We are currently evaluating the potential impacts of the order, and will seek recovery of any associated costs through the ratemaking process.
Regulatory Matters
We regularly review the need for electric and natural gas rate changes in each state in which we provide service. We expect to continue to file for rate adjustments to:
• seek recovery of operating costs and capital investments, and
• seek the opportunity to earn reasonable returns as allowed by regulators.
With regards to the timing and plans for future filings, the assessment of our
need for rate relief and the development of rate case plans takes into
consideration short-term and long-term needs, as well as specific factors that
can affect the timing of rate filings. Such factors include, but are not limited
to, in-service dates of major capital investments and the timing of changes in
major revenue and expense items.
41--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION Avista Utilities Washington General Rate Cases 2015General Rate Cases
In
PC Petition for Judicial Review
InMarch 2016 , PC filed inThurston County Superior Court a Petition for Judicial Review of the WUTC's Orders. InApril 2016 , this matter was certified for review directly by theCourt of Appeals , an intermediate appellate court in theState of Washington . InAugust 2018 , theCourt of Appeals issued a "Published Opinion" (Opinion) which concluded that the WUTC's use of an attrition allowance to calculateAvista Corp.'s rate base violatedWashington law. In the Opinion, the Court stated that because the projected additions to rate base in the future were not "used and useful" for service at the time the request for the rate increase was made, they may not lawfully be included in our rate base to justify a rate increase. Accordingly, the Court concluded that the WUTC erred in including an attrition allowance in the calculation of our electric and natural gas rate base. The Court noted, however, that the law does not prohibit an attrition allowance in the calculation, for ratemaking purposes, of recoverable operating and maintenance expense. Since the WUTC order provided one lump sum attrition allowance without distinguishing what portion was for rate base and which was for operating and maintenance expenses or other considerations, the Court struck all portions of the attrition allowance attributable to our rate base and reversed and remanded the case for the WUTC to recalculate our rates without including an attrition allowance in the calculation of rate base. InMarch 2020 , we received an order from the WUTC that requires us to refund$8.5 million to electric and natural gas customers. We are refunding$4.9 million to electric customers and$3.6 million to natural gas customers. We previously recorded a customer refund liability of$3.6 million in 2019. The refund will be returned to customers over a twelve-month period that began onApril 1, 2020 . 2019General Rate Cases InMarch 2020 , we received an order from the WUTC that approved the partial multi-party settlement agreement that was filed inNovember 2019 . The approved rates are designed to increase annual base electric revenues by$28.5 million , or 5.7 percent, and annual natural gas base revenues by$8.0 million , or 8.5 percent, effectiveApril 1, 2020 . The revenue increases are based on a 9.4 percent return on equity (ROE) with a common equity ratio of 48.5 percent and a rate of return on rate (ROR) base of 7.21 percent. As part of the WUTC order, we are returning approximately$40 million from the ERM rebate to customers over a two-year period. The ERM rebate includes approximately$3 million that was recently disallowed by the WUTC for the cost of replacement power during an unplanned outage at theColstrip generating facility in 2018. The WUTC directed us to return a larger portion of the ERM rebate during the first year to achieve a net-zero billed impact to electric customers. Included in the WUTC order is the acceleration of depreciation of Colstrip Units 3 & 4 to reflect a remaining useful life throughDecember 31, 2025 . The order utilizes certain electric tax benefits associated with the 2018 tax reform to partially offset these increased costs. The order also sets aside$3 million for community transition efforts to mitigate the impacts of the eventual closure ofColstrip , half funded by customers and half funded by our shareholders. We recorded this liability and recognized the shareholder portion of the expense in the first quarter of 2020. Lastly, the order includes the extension of electric and natural gas decoupling mechanisms throughMarch 31, 2025 , with one modification in that new customers added after any test period would not be decoupled until included in a future test period. 2020General Rate Cases InOctober 2020 , we filed electric and natural gas general rate cases with the WUTC. We have requested an overall increase in base electric revenues of$44.2 million (or 8.3 percent), which would be entirely offset by a tax credit to customers of the same amount. 42
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION Additionally, we have requested an overall increase in base natural gas revenues of$12.8 million (or 12.2 percent), which would be entirely offset by a tax credit to customers of the same amount. The revenue increases are based on a 9.9 percent ROE with a common equity ratio of 50 percent and a ROR of 7.43 percent. Included in our general rate case requests are the recovery of ourAdvanced Metering Infrastructure (AMI) Project costs. AMI project costs represented 42 percent of our electric base rate request and 54 percent of our natural gas base rate request.
See "Note 7 of the Notes to Condensed Consolidated Financial Statements" for further discussion on the tax credit to customers.
Idaho
2019
InOctober 2019 ,Avista Corp. and all parties to our electric general rate case reached a settlement agreement that was approved by the IPUC. New rates went into effect onDecember 1, 2019 . The rates that went into effect are designed to decrease annual base electric revenues by$7.2 million (or 2.8 percent), effectiveDecember 1, 2019 . The settlement revenue decreases are based on a 9.5 percent ROE with a common equity ratio of 50 percent and a ROR on rate base of 7.35 percent, which is a continuation of current levels. This outcome is in line with our expectations. The primary element of the difference in the agreed upon base revenues in the settlement agreement from our original request is that the settlement includes the continued recovery of costs for our wind generation power purchase agreements, which will include Palouse Wind and Rattlesnake Flat, through the PCA mechanism rather than through base rates.
2021
We expect to file electric and natural gas general rate cases with the IPUC in the first quarter of 2021. We delayed the filing of this case in order to capture in rates a level of plant and costs that will be more reflective of the rate effective period. Oregon General Rate Cases 2019General Rate Case
In
OPUC approved rates that are designed to increase annual natural gas billed
revenues by
The OPUC's decision reflects a ROR on rate base of 7.24 percent, with a common equity ratio of 50 percent and a 9.4 percent ROE, both of which represent a continuation of existing authorized levels.
In addition, the approved settlement agreements included agreement among the parties to a future independent review of our interest rate hedging practices, with any recommendations based on the results and findings in the final report to be applicable only on a prospective basis and do not apply to any prior interest rate hedging activity.
2020
InMarch 2020 , we filed a natural gas general rate case with the OPUC. We have requested an overall increase in base natural gas rates of 9.8 percent (designed to increase annual natural gas revenues by$6.8 million ). Our request was based on a proposed ROR on rate base of 7.50 percent with a common equity ratio of 50 percent and a 9.9 percent ROE. Through several settlement stipulations the parties have resolved all issues in the general rate case. The settlements are designed to increase annual base revenue by$4.4 million , or 6.3 percent effectiveJanuary 15, 2021 . The agreed-upon ROE is 9.4 percent, with a common equity ratio of 50 percent and a proposed ROR of 7.24 percent. The settlements are before the OPUC, and we expect an order in the fourth quarter of 2020. 43
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION AMI Project InMarch 2016 , the WUTC granted our Petition for an Accounting Order to defer and include in a regulatory asset the undepreciated value of our existingWashington electric meters for the opportunity for later recovery. This accounting treatment is related to our ongoing project to replace our existing electric meters with new two-way digital meters and the related software and support services through our AMI project inWashington State . As ofSeptember 30, 2020 , the estimated future undepreciated value for the existing electric meters was$21.8 million . InSeptember 2017 , the WUTC also approved our request to defer the undepreciated net book value of existing natural gas encoder receiver transmitters (ERT) (consistent with the accounting treatment we obtained on our existing electric meters) that are being retired as part of the AMI project. As ofSeptember 30, 2020 , the estimated future undepreciated value for the existing natural gas ERTs was$2.3 million .
In
InMay 2017 , we filed Petitions with the IPUC and the OPUC requesting a depreciable life of 12.5 years for the meter data management system (MDM) related to the AMI project. Both the IPUC and the OPUC approved our request. In addition, in connection with the 2017 Idaho electric general rate case, the settling parties agreed to cost recovery ofIdaho's share of the MDM system, effectiveJanuary 1, 2019 . In connection with the approval of theOregon general rate case settlement, the OPUC approved cost recovery ofOregon's share of the MDM system, effectiveNovember 1, 2017 .
Purchased Gas Adjustments
PGAs are designed to pass through changes in natural gas costs toAvista Utilities' customers with no change in utility margin (operating revenues less resource costs) or net income. InOregon , we absorb (cost or benefit) 10 percent of the difference between actual and projected natural gas costs included in retail rates for supply that is not hedged. Total net deferred natural gas costs among all jurisdictions was an asset of$1.7 million as ofSeptember 30, 2020 and a net liability of$3.2 million as ofDecember 31, 2019 .
Power Cost Deferrals and Recovery Mechanisms
The ERM is an accounting method used to track certain differences betweenAvista Utilities' actual power supply costs, net of wholesale sales and sales of fuel, and the amount included in base retail rates for ourWashington customers. Under the ERM,Avista Utilities makes an annual filing on or beforeApril 1 of each year to provide the opportunity for the WUTC staff and other interested parties to review the prudence of and audit the ERM deferred power cost transactions for the prior calendar year. See the 2019 Form 10-K for a full discussion of the mechanics of the ERM and the various sharing bands. Total net deferred power costs under the ERM were a liability of$39.6 million as ofSeptember 30, 2020 , compared to a liability of$37.0 million as ofDecember 31, 2019 . These deferred power cost balances represent amounts due to customers. Pursuant to WUTC requirements, should the cumulative deferral balance exceed$30 million in the rebate or surcharge direction, we must make a filing with the WUTC to adjust customer rates to either return the balance to customers or recover the balance from customers. The cumulative rebate balance exceeds$30 million and as a result, our 2019 filing contained a proposed rate refund. The ERM proceeding was considered with our 2019 general rate case proceeding and a refund was approved and is being returned to customers over a two-year period that began onApril 1, 2020 . See further discussion in the section "Washington General Rate Cases" above.Avista Utilities has a PCA mechanism inIdaho that allows us to modify electric rates onOctober 1 of each year with IPUC approval. Under the PCA mechanism, we defer 90 percent of the difference between certain actual net power supply expenses and the amount included in base retail rates for ourIdaho customers. TheOctober 1 rate adjustments recover or rebate power supply costs deferred during the preceding July-June twelve-month period. Total net power supply costs deferred under the PCA mechanism were assets of$0.7 million as ofSeptember 30, 2020 and$0.3 million as ofDecember 31, 2019 . These deferred power cost balances represent amounts due from customers. 44
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION
Decoupling and Earnings Sharing Mechanisms
Decoupling (also known as anFCA inIdaho ) is a mechanism designed to sever the link between a utility's revenues and consumers' energy usage. In each of our jurisdictions,Avista Utilities' electric and natural gas revenues are adjusted so as to be based on the number of customers in certain customer rate classes and assumed "normal" kilowatt hour and therm sales, rather than being based on actual kilowatt hour and therm sales. The difference between revenues based on the number of customers and "normal" sales and revenues based on actual usage is deferred and either surcharged or rebated to customers beginning in the following year. Only residential and certain commercial customer classes are included in our decoupling mechanisms. See the 2019 Form 10-K for a discussion of the mechanisms in each jurisdiction. Total net cumulative decoupling deferrals among all jurisdictions were regulatory assets of$20.9 million as ofSeptember 30, 2020 and$24.3 million as ofDecember 31, 2019 . These decoupling assets represent amounts due from customers. Total net earnings sharing balances among all jurisdictions were regulatory liabilities of$0.7 million as ofSeptember 30, 2020 andDecember 31, 2019 . These earnings sharing liabilities represent amounts due to customers.
See "Results of Operations -
COVID-19 Deferrals
See "Note 1 of the Notes to Condensed Consolidated Financial Statements" for discussion on COVID-19 deferrals.
Results of Operations - Overall
The following provides an overview of changes in our Condensed Consolidated Statements of Income. More detailed explanations are provided, particularly for operating revenues and operating expenses, in the business segment discussions (Avista Utilities , AEL&P, and the other businesses) that follow this section.
The balances included below for utility operations reconcile to the Condensed Consolidated Statements of Income.
45--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION
Three months ended
The following graph shows the total change in net income attributable toAvista Corp. shareholders for the third quarter of 2020 compared to the third quarter of 2019, as well as the various factors that caused such change (dollars in millions): [[Image Removed]] Utility revenues decreased atAvista Utilities when compared to the third quarter of 2019. The decrease was primarily a result of a decrease in sales of fuel and wholesale natural gas sales, both of which were a result of our optimization activities. There was a decrease in electric decoupling revenue primarily due to the amortization of decoupling surcharges from prior years and current year decoupling rebates to residential customers due to higher usage compared to normal. The above decreases were partially offset by an overall increase in electric load of 0.5 percent when compared to the third quarter of 2019, which consisted of a 7 percent increase in residential load and decreases of 5 percent and 3 percent in commercial and industrial load, respectively. AEL&P's revenues increased from an increase in sales volumes due to weather that was cooler than the prior year.
Utility resource costs decreased at
The increase in utility operating expenses was primarily due to increases in bad
debt expense, which were partially offset by decreases in
Utility depreciation and amortization increased due to additions to utility plant.
The increase in other was primarily related to a decrease in net loss on investments in the third quarter of 2020 compared to the third quarter of 2019.
Income taxes increased primarily due to an annual book to tax return adjustment
that increased expenses in the third quarter of 2020 compared to a favorable
adjustment in 2019.
46
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION
Nine months ended
The following graph shows the total change in net income attributable toAvista Corp. shareholders for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 , as well as the various factors that caused such change (dollars in millions): [[Image Removed]] Utility revenues decreased atAvista Utilities primarily due to an overall decrease in electric load of 3 percent when compared to the year-to-date 2019, which consisted of a 6 percent and a 5 percent decrease in commercial and industrial load, respectively. The decreases in commercial and industrial were partially offset by a 1 percent increase in residential electric load when compared to the year-to-date 2019. The outcome from the 2015 Washington general rate cases decreased revenue by$4.9 million . The above decreases were partially offset by an increase from electric and natural gas decoupling rates, higher PGA rates and customer growth. AEL&P's revenues increased from an increase in sales volumes due to weather that was cooler than the prior year.
Non-utility revenues decreased due to the sale of METALfx, which occurred in
Utility resource costs decreased at
The increase in utility operating expenses was due to an increase atAvista Utilities primarily related to increases in generation and distribution operating and maintenance costs, an accrual for disallowed replacement power during an unplanned outage atColstrip (see "Regulatory Matters"), and an increase in bad debt expense. There was a decrease in utility operating expenses due to a$7.0 million donation commitment made in the second quarter of 2019 that was a one-time donation.
The merger transaction costs are related to the proposed (now terminated) acquisition by Hydro One. There were no additional costs in 2020 relating to this matter.
Utility depreciation and amortization increased due to additions to utility plant. Also, in the second quarter of 2020 we were able to utilize approximately$10.6 million ($8.4 million when tax-effected) of electric tax benefits to offset costs associated accelerating the depreciation of Colstrip Units 3 & 4 based on a settlement inWashington . This amount was recorded as a one-time increase to 47
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION
depreciation expense in the second quarter of 2020 and was offset with a
decrease in income tax expense. In the second quarter of 2019, a similar item
was recorded in
The merger termination fee was related to the termination of the proposed Hydro One acquisition.
Income taxes decreased primarily due to a decrease in income before taxes. Our effective tax rate was 2.0 percent for the nine months endedSeptember 30, 2020 , compared to 16.2 percent for nine months endedSeptember 30, 2019 . The tax rate was lower in both 2020 and 2019 due to the offset of deferred income taxes against accelerated depreciation forColstrip as provided in the 2019 Washington general rate case settlement, which was recorded in the second quarter 2020. This amounted to$8.4 million in 2020 as compared to$5.1 million in 2019. See "Note 7 of the Notes to Condensed Consolidated Financial Statements" for further details and a reconciliation of our effective tax rate.
Non-GAAP Financial Measures
The following discussion forAvista Utilities includes two financial measures that are considered "non-GAAP financial measures": electric utility margin and natural gas utility margin. In the AEL&P section, we include a discussion of utility margin, which is also a non-GAAP financial measure. Generally, a non-GAAP financial measure is a numerical measure of a company's financial performance, financial position or cash flows that excludes (or includes) amounts that are included (excluded) in the most directly comparable measure calculated and presented in accordance with GAAP. Electric utility margin is electric operating revenues less electric resource costs, while natural gas utility margin is natural gas operating revenues less natural gas resource costs. The most directly comparable GAAP financial measure to electric and natural gas utility margin is utility operating revenues as presented in "Note 17 of the Notes to Condensed Consolidated Financial Statements." The presentation of electric utility margin and natural gas utility margin is intended to enhance the understanding of operating performance. We use these measures internally and believe they provide useful information to investors in their analysis of how changes in loads (due to weather, economic or other conditions), rates, supply costs and other factors impact our results of operations. Changes in loads, as well as power and natural gas supply costs, are generally deferred and recovered from customers through regulatory accounting mechanisms. Accordingly, the analysis of utility margin generally excludes most of the change in revenue resulting from these regulatory mechanisms. We present electric and natural gas utility margin separately below forAvista Utilities since each business has different cost sources, cost recovery mechanisms and jurisdictions, so we believe that separate analysis is beneficial. These measures are not intended to replace utility operating revenues as determined in accordance with GAAP as an indicator of operating performance. Reconciliations of operating revenues to utility margin are set forth below. 48
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION
Results of Operations -
Three months ended
Utility Operating Revenues
The following graphs presentAvista Utilities' electric operating revenues and megawatt-hour (MWh) sales for the three months endedSeptember 30, 2020 and 2019 (dollars in millions and MWhs in thousands):
[[Image Removed]]
(1) This balance includes public street and highway lighting, which is considered
part of retail electric revenues, and deferrals/amortizations to customers
related to federal income tax law changes.
49
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION Total electric operating revenues in the graph above include intracompany sales of$10.2 million and$8.5 million for the three months endedSeptember 30, 2020 and 2019, respectively. [[Image Removed]] The following table presents the current year deferrals and the amortization of prior year decoupling balances that are reflected in utility electric operating revenues for the three months endedSeptember 30 (dollars in thousands): Electric Decoupling Revenues 2020 2019 Current year decoupling deferrals (a)$ (1,316 ) $ 5,361 Amortization of prior year decoupling deferrals (b) (4,067 ) 563 Total electric decoupling revenue$ (5,383 ) $ 5,924
(a) Positive amounts are increases in decoupling revenue in the current year and
will be surcharged to customers in future years. Negative amounts are
decreases in decoupling revenue in the current year and will be rebated to
customers in future years.
(b) Positive amounts are increases in decoupling revenue in the current year and
are related to the amortization of rebate balances that resulted in prior
years and are being refunded to customers (causing a corresponding decrease
in retail revenue from customers) in the current year. Negative amounts are
decreases in decoupling revenue in the current year and are related to the
amortization of surcharge balances that resulted in prior years and are being
surcharged to customers (causing a corresponding increase in retail revenue
from customers) in the current year.
Total electric revenues decreased$6.9 million for the third quarter of 2020 as compared to the third quarter of 2019. The primary fluctuations that occurred during the period were as follows:
• a
revenue per MWh (increased revenues $4.3 million ) and an increase in
total MWhs sold (increased revenues $0.6 million ).
o The increase in total retail MWhs sold was primarily the result of an
increase in residential sales volumes and customer growth. This was
partially offset by a decrease in commercial and industrial sales
volumes mostly due to COVID-19 impacts. In addition, weather was
warmer than normal and warmer than the prior year, which increased
cooling loads. Compared to the third quarter of 2019,residential
electric use per customer increased 5 percent,
50
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION commercial use per customer decreased 6 percent and industrial use per customer decreased 1 percent. Cooling degree days inSpokane were 5 percent above normal and 26 percent above the prior year. Heating degree days inSpokane were 36 percent below normal, and 44 percent below the third quarter of 2019.
o The increase in revenue per MWh was primarily due to an increase in
decoupling rates (as there was a decoupling surcharge in 2020 compared
to a decoupling rebate in 2019) and also a general rateincrease in
Washington , effectiveApril 1, 2020 . This was partially offset by a general rate decrease inIdaho , effectiveDecember 1, 2019 . • a$0.6 million increase in wholesale electric revenues due to an increase
in sales prices (increased revenues
decrease in sales volumes (decreased revenues
fluctuation in volumes was primarily the result of how much we were able
to optimize our generation assets as compared to the prior year.
• a
resource optimization activities.
• an
the amortization of decoupling surcharges from prior years and current
year decoupling rebates to residential customers due to higher usage
compared to normal, partially related to the Stay-at-Home orders from the
were partially offset by decoupling surcharges to non-residential
customers as commercial usage was down compared to normal during the
third quarter primarily due to COVID-19 impacts.
• a
transmission revenue and the amortization of the 2015 remand accrual.
The following graphs present
[[Image Removed]]
(1) This balance includes interruptible and industrial revenues, which are
considered part of retail natural gas revenues, and deferrals/amortizations
to customers related to federal income tax law changes.
51
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION
Total natural gas operating revenues in the graph above include intracompany
sales of
[[Image Removed]]
The following table presents the current year deferrals and the amortization of
prior year decoupling balances that are reflected in utility natural gas
operating revenues for the three months ended
Natural Gas Decoupling Revenues
2020 2019
Current year decoupling deferrals (a) $ 1,540 $ (422 ) Amortization of prior year decoupling deferrals (b) (129 ) 535 Total natural gas decoupling revenue $ 1,411
$ 113
(a) Positive amounts are increases in decoupling revenue in the current year and
will be surcharged to customers in future years. Negative amounts are
decreases in decoupling revenue in the current year and will be rebated to
customers in future years.
(b) Positive amounts are increases in decoupling revenue in the current year and
are related to the amortization of rebate balances that resulted in prior
years and are being refunded to customers (causing a corresponding decrease
in retail revenue from customers) in the current year. Negative amounts are
decreases in decoupling revenue in the current year and are related to the
amortization of surcharge balances that resulted in prior years and are being
surcharged to customers (causing a corresponding increase in retail revenue
from customers) in the current year.
Total natural gas revenues decreased$3.2 million for the third quarter of 2020 as compared to the third quarter of 2019. The primary fluctuations that occurred during the period were as follows:
• a
industrial, which is included in other) due to an increase in retail
rates (increased revenues
volumes (decreased revenues $2.9 million ).
o Retail rates increased from higher PGA rates, decoupling rate
increases and general rate increases in Oregon , effective
2020 and Washington , effective April 1, 2020 .
52
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION o Retail natural gas sales volumes decreased in the third quarter of 2020 as compared to the third quarter of 2019 primarily due to lower commercial and industrial usage related to COVID-19, as well as lower residential usage. The residential usage decrease was primarily related to weather that was warmer than the prior year and
warmer than
normal which decreased heating loads. The decrease in usage was
partially offset by customer growth in the third quarter.Compared to
the third quarter of 2019, residential use per customerdecreased 10
percent, commercial use per customer decreased 22 percent and
industrial use per customer decreased 6 percent. Heating degree days
in Spokane were 36 percent below normal and 44 percent below the third
quarter of 2019. Heating degree days in Medford were 57 percent below
normal and 79 percent below the third quarter of 2019.
• a $5.7 million decrease in wholesale natural gas revenues due to a
decrease in volumes (decreased revenues $6.0 million ), partially offset
by an increase in prices (increased revenues
between revenues and costs from sales of resources in excess of retail
load requirements and from resource optimization are accounted for
through the PGA mechanisms.
• a
related to decoupling surcharges in the third quarter 2020 resulting from
weather that was warmer than normal and lower commercial usage due to
COVID-19 impacts.
The following table presents Avista Utilities' average number of electric and
natural gas retail customers for the three months ended September 30, 2020 and
2019:
Electric Customers Natural Gas Customers
2020 2019 2020 2019
Residential 350,831 343,345 327,073 319,634
Commercial 43,510 42,846 36,074 35,604
Interruptible - - 40 43
Industrial 1,297 1,301 239 243
Public street and highway lighting 629 615 - -
Total retail customers 396,267 388,107 363,426 355,524
53
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION Utility Resource Costs
The following graphs present
[[Image Removed]]
Total electric resource costs in the graph above include intracompany resource
costs of
Total electric resource costs decreased$14.2 million for the third quarter of 2020 as compared to the third quarter of 2019. The primary fluctuations that occurred during the period were as follows:
• a
prices (decreased costs
the volume of power purchases (increased costs
fluctuation in volumes was primarily the result of how much we were able
to optimize our generation assets as compared to the prior year.
• a
thermal generation due to higher hydroelectric generation as compared to
the third quarter of 2019. There was also a decrease in total MWhs sold
(which required less fuel for electric generation).
• a
related derivative instruments that were purchased for generation but
were later sold when conditions indicated that it was more economical to
sell the fuel as part of the resource optimization process. When the fuel
or related derivative instruments are sold, that revenue is included in
sales of fuel.
• a
related to increased amortizations associated with the Washington ERM and
a residential exchange credit.
54
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION [[Image Removed]]
Total natural gas resource costs in the graph above include intracompany
resource costs of
Total natural gas resource costs decreased
• a
the price of natural gas (increased costs
offset by a decrease in volumes (decreased costs
• a
gas costs.
Utility Margin
The following table reconciles
Electric Natural Gas Intracompany Total
2020 2019 2020 2019 2020 2019 2020 2019 Operating revenues
$ 225,416 $ 232,320 $ 62,107 $
65,266
65,527 79,698 36,275 41,354 (23,959 ) (22,655 ) $ 77,843 $ 98,397
Utility margin $ 159,889 $ 152,622 $ 25,832 $ 23,912 $ - $ - $ 185,721 $ 176,534 Electric utility margin increased
Electric utility margin increased primarily due to a decrease in net power supply costs as compared to the prior year as costs in the prior year were higher than those recovered through our rates (authorized costs), whereas in 2020 they were lower than authorized costs. For the third quarter of 2020, we had a$0.3 million pre-tax benefit under the ERM inWashington , compared to a$2.4 million pre-tax expense for the third quarter of 2019. We also had customer growth and general rate increases inWashington , effectiveApril 1, 2020 , which contributed to additional margin. The above increases were partially offset by lower commercial and industrial loads, mainly due to COVID-19, and a portion of these loads, primarily industrial loads, are not covered by our decoupling mechanisms. 55
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION Natural gas utility margin increased primarily due to a general rate increase inOregon , effectiveJanuary 15, 2020 andWashington , effectiveApril 1, 2020 , and customer growth. Intracompany revenues and resource costs represent purchases and sales of natural gas between our natural gas distribution operations and our electric generation operations (as fuel for our generation plants). These transactions are eliminated in the presentation of total results forAvista Utilities and in the condensed consolidated financial statements but are included in the separate results for electric and natural gas presented above.
Nine months ended
Utility Operating Revenues
The following graphs presentAvista Utilities' electric operating revenues and megawatt-hour (MWh) sales for the nine months endedSeptember 30, 2020 and 2019 (dollars in millions and MWhs in thousands):
[[Image Removed]]
(1) This balance includes public street and highway lighting, which is considered
part of retail electric revenues, and deferrals/amortizations to customers
related to federal income tax law changes.
56
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION Total electric operating revenues in the graph above include intracompany sales of$25.1 million and$34.3 million for the nine months endedSeptember 30, 2020 and 2019, respectively. [[Image Removed]] The following table presents the current year deferrals and the amortization of prior year decoupling balances that are reflected in utility electric operating revenues for the nine months endedSeptember 30 (dollars in thousands): Electric Decoupling Revenues 2020 2019 Current year decoupling deferrals (a) $ 9,657$ 7,839 Amortization of prior year decoupling deferrals (b) (12,333 )
2,172
Total electric decoupling revenue$ (2,676 ) $ 10,011
(a) Positive amounts are increases in decoupling revenue in the current year and
will be surcharged to customers in future years. Negative amounts are
decreases in decoupling revenue in the current year and will be rebated to
customers in future years.
(b) Positive amounts are increases in decoupling revenue in the current year and
are related to the amortization of rebate balances that resulted in prior
years and are being refunded to customers (causing a corresponding decrease
in retail revenue from customers) in the current year. Negative amounts are
decreases in decoupling revenue in the current year and are related to the
amortization of surcharge balances that resulted in prior years and are being
surcharged to customers (causing a corresponding increase in retail revenue
from customers) in the current year.
Total electric revenues decreased$33.0 million for the first nine months of 2020 as compared to the first nine months of 2019. The primary fluctuations that occurred during the period were as follows:
• a
total MWhs sold (decreased revenues
an increase in revenue per MWh (increased revenues $11.4 million ).
57
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION o The decrease in total retail MWhs sold was primarily the result of a decrease in sales volumes to commercial customers and
industrial customers due to a combination of impacts associated with
COVID-19, as well as weather that was milder than normal and the prior
year during the first nine months of the year. These werepartially
offset by residential and commercial customer growth. Compared to the
first nine months of 2019, residential electric use percustomer
decreased 1 percent, commercial use per customer decreased 7 percent
and industrial use per customer increased 1 percent. Theindustrial
increase was all related to Idaho as Washington saw a 9 percent
decrease in industrial use per customer. Heating degree days in
Spokane were 8 percent below normal and 11 percent below the first
nine months of 2019. Cooling degree days were 2 percent abovenormal,
but 12 percent below the first nine months of 2019.
o The increase in revenue per MWh was primarily due to an increase in
decoupling rates (as there was a decoupling surcharge in 2020 compared
to a decoupling rebate in 2019) and a general rate increase in
Washington , effective April 1, 2020 . This was partially offset by a
general rate decrease in Idaho , effective December 1, 2019 .
• a
resource optimization activities.
• a
to the amortization of decoupling surcharges from prior years. This was
partially offset by decoupling surcharges for non-residential customers
as commercial usage was down compared to normal during the second and
third quarters due to COVID-19 impacts. In addition, weather was milderthan normal in the first half of 2020, which also resulted in decoupling
surcharges.
The following graphs present
[[Image Removed]]
(1) This balance includes interruptible and industrial revenues, which are
considered part of retail natural gas revenues, and deferrals/amortizations
to customers related to federal income tax law changes.
58
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION Total natural gas operating revenues in the graph above include intracompany sales of$37.8 million and$44.4 million for the nine months endedSeptember 30, 2020 and 2019, respectively. [[Image Removed]]
The following table presents the current year deferrals and the amortization of
prior year decoupling balances that are reflected in utility natural gas
operating revenues for the nine months ended
Natural Gas Decoupling Revenues
2020 2019
Current year decoupling deferrals (a) $ 641$ (3,390 ) Amortization of prior year decoupling deferrals (b) (1,988 ) 4,483 Total natural gas decoupling revenue$ (1,347 ) $ 1,093
(a) Positive amounts are increases in decoupling revenue in the current year and
will be surcharged to customers in future years. Negative amounts are
decreases in decoupling revenue in the current year and will be rebated to
customers in future years.
(b) Positive amounts are increases in decoupling revenue in the current year and
are related to the amortization of rebate balances that resulted in prior
years and are being refunded to customers (causing a corresponding decrease
in retail revenue from customers) in the current year. Negative amounts are
decreases in decoupling revenue in the current year and are related to the
amortization of surcharge balances that resulted in prior years and are being
surcharged to customers (causing a corresponding increase in retail revenue
from customers) in the current year.
Total natural gas revenues decreased$16.1 million for the first nine months of 2020 as compared to the first nine months of 2019. The primary fluctuations that occurred during the period were as follows:
• an
increase in retail rates (increased revenues
offset by a decrease in volumes (decreased revenues $12.7 million ).
o Retail rates increased from higher PGA rates, decoupling rate
increases and general rate increases in Oregon , effective
2020 and Washington , effective April 1, 2020 .
o Retail natural gas sales decreased in the first nine months of 2020 as
compared to the first nine months of 2019 primarily due to lower
residential, commercial and industrial usage, partially offset by
customer growth. Compared
59
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION to the first nine months of 2019, residential use per customer decreased 8 percent, commercial use per customer decreased 12 percent and industrial use per customer decreased 11 percent. Heating degree days inSpokane were 8 percent below normal, and 11 percent below the first nine months of 2019. Heating degree days inMedford were normal, but 4 percent below the first nine months of 2019. • a$28.7 million decrease in wholesale natural gas revenues due to a
decrease in prices (decreased revenues
volumes (decreased revenues
and costs from sales of resources in excess of retail load requirements
and from resource optimization are accounted for through the PGA
mechanisms.
• a
related to the amortization of decoupling surcharges from prior years.
Also, during the first quarter, there were decoupling rebates to
customers and this was partially offset by customer surcharges during the
second and third quarters, mainly due to weather that was milder than
normal and due to the impacts of COVID-19.
• the
related to a $3.6 million accrual for customer refunds related to our
2015 Washington general rate case that was remanded back to the WUTC
during 2019. See "Regulatory Matters" for further discussion.
The following table presents Avista Utilities' average number of electric and
natural gas retail customers for the nine months ended September 30, 2020 and
2019:
Electric Customers Natural Gas Customers
2020 2019 2020 2019
Residential 349,890 343,875 326,568 320,084
Commercial 43,399 42,881 36,139 35,715
Interruptible - - 40 44
Industrial 1,297 1,307 240 241
Public street and highway lighting 639 607 - -
Total retail customers 395,225 388,670 362,987 356,084
60
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION Utility Resource Costs
The following graphs present
[[Image Removed]]
Total electric resource costs in the graph above include intracompany resource costs of$37.8 million and$44.4 million for the nine months endedSeptember 30, 2020 and 2019, respectively. Total electric resource costs decreased$46.0 million for the first nine months of 2020 as compared to the first nine months of 2019. The primary fluctuations that occurred during the period were as follows:
• a
wholesale prices (decreased costs
increase in the volume of power purchases (increased costs
The fluctuation in volumes was primarily the result of changes in how we
were able to optimize our generation assets as compared to the prior
year.
• a
lower thermal generation due to higher hydroelectric generation as
compared to the first nine months of 2019. There was also a decrease in
total MWhs sold (which required less fuel for electric generation).
• an
the related derivative instruments that were purchased for generation but
were later sold when conditions indicated that it was more economical to
sell the fuel as part of the resource optimization process. When the fuel
or related derivative instruments are sold, that revenue is included in
sales of fuel.
• an
related to increased amortizations associated with the Washington ERM, a
residential exchange credit and demand side management programs.
61
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION [[Image Removed]]
Total natural gas resource costs in the graph above include intracompany
resource costs of
Total natural gas resource costs decreased
• a
the price of natural gas (decreased costs
in volumes purchased (decreased costs
• a
gas costs, primarily due to a spike in natural gas prices during the
first quarter of 2019 from a natural gas supply disruption in
which resulted in a significant amount of PGA deferrals during that
period.
Utility Margin
The following table reconciles
Electric Natural Gas Intracompany Total
2020 2019 2020 2019 2020 2019 2020 2019
Operating revenues $ 685,409 $ 718,378 $ 286,612 $ 302,709 $ (62,912 ) $ (78,646 ) $ 909,109 $ 942,441
Resource costs 193,150 239,143 144,230 165,118 (62,912 ) (78,646 ) $ 274,468 $ 325,615
Utility margin $ 492,259 $ 479,235 $ 142,382 $ 137,591 $ - $ - $ 634,641 $ 616,826 Electric utility margin increased
62
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION For the first nine months of 2020, we had a$5.9 million pre-tax benefit under the ERM inWashington , compared to a$1.1 million pre-tax benefit for the first nine months of 2019. For the full year of 2020, we expect to be in a benefit position under the ERM within the 90 percent customer/10 percent Company sharing band. In addition, electric utility margin was positively impacted by a general rate increase inWashington , effectiveApril 1, 2020 and customer growth. The above increase was partially offset by lower commercial and industrial loads in the second and third quarters of 2020, mainly due to COVID-19. A portion of the commercial loads and all of the industrial loads are not covered by our decoupling mechanisms. Also, in the first quarter of 2020 we had an accrual for customer refunds of$1.4 million related to our 2015 Washington general rate case that was remanded back to the WUTC during 2019. See "Regulatory Matters" for further discussion. Natural gas utility margin increased primarily due to general rate increases inOregon , effectiveJanuary 15, 2020 andWashington , effectiveApril 1, 2020 and customer growth. These increases were partially offset by an accrual for customer refunds of$3.6 million related to our 2015 Washington general rate case that was remanded back to the WUTC during 2019. See "Regulatory Matters" for further discussion. Intracompany revenues and resource costs represent purchases and sales of natural gas between our natural gas distribution operations and our electric generation operations (as fuel for our generation plants). These transactions are eliminated in the presentation of total results forAvista Utilities and in the condensed consolidated financial statements but are included in the separate results for electric and natural gas presented above.
Results of Operations -
Three months ended
Net income for AEL&P was$0.3 million for the three months endedSeptember 30, 2020 compared to$0.2 million for the three months endedSeptember 30, 2019 . Net income was$5.0 million for the nine months endedSeptember 30, 2020 compared to$4.8 million for the nine months endedSeptember 30, 2019 .
The following table presents AEL&P's operating revenues, resource costs and
resulting utility margin for the three and nine months ended
Three months ended September 30, Nine months ended September 30,
2020 2019 2020 2019
Operating revenues $ 8,815 $ 7,790 $ 31,014 $ 27,414
Resource costs (benefit) 942 (73 ) 1,829 (1,505 )
Utility margin $ 7,873 $ 7,863 $ 29,185 $ 28,919 Electric revenues increased for the third quarter of 2020 primarily due to higher sales volumes to residential and commercial customers for 2020 as compared to 2019. This resulted from weather that was cooler than the prior year, as well as more hydroelectric generation than the third quarter of 2019.
AEL&P had low hydroelectric generation during the first three quarters of 2019, which limited energy provided to their interruptible customers. A portion of the sales to interruptible customers is used to reduce the overall cost of power to AEL&P's firm customers. When interruptible sales are below a certain threshold, AEL&P recognizes a regulatory asset and records a reduction to deferred power supply costs (resource costs) to reflect a future billable amount to its firm customers when the cost of power rates are reset. During the first three quarters of 2020, hydroelectric generation returned to normal levels, which resulted in less resource costs compared to the first three quarters of 2019. While the COVID-19 pandemic and a challengedAlaska economy may introduce unpredictability into the remainder of 2020, AEL&P has the capacity to manage costs. 63
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION
Results of Operations - Other Businesses
Our other businesses had a net loss of$0.9 million for the three months endedSeptember 30, 2020 compared to a net loss of$1.1 million for the three months endedSeptember 30, 2019 . A net loss of$3.4 million was recognized for the nine months endedSeptember 30, 2020 compared to net income of$2.3 million for the nine months endedSeptember 30, 2019 . During the first three quarters of 2020, we had impairment losses on some of our investments and the write-off of a note receivable. This is compared to the first three quarters of 2019 that resulted in net investment gains, primarily related to the sale of METALfx. See "Note 19 of the Notes to Condensed Consolidated Financial Statements" for further discussion on the sale of METALfx.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Changes in these estimates and assumptions are considered reasonably possible and may have a material effect on our consolidated financial statements and thus actual results could differ from the amounts reported and disclosed herein. Our critical accounting policies that require the use of estimates and assumptions were discussed in detail in the 2019 Form 10-K and have not changed materially.
Liquidity and Capital Resources
Overall Liquidity
We expect that COVID-19 will have a negative impact on our overall liquidity. For 2020, we expect our net cash flows from operations to decrease primarily due to lower expected revenues from retail sales of electricity and natural gas and lower payments from customers. In response to potential liquidity needs, inApril 2020 , we entered into a$100 million credit agreement, see "Note 9 of the Notes to Condensed Consolidated Financial Statements."
Other than COVID-19 impacts, our sources of overall liquidity and the
requirements for liquidity have not materially changed in the nine months ended
As ofSeptember 30, 2020 , we had$324.4 million of available liquidity under theAvista Corp. committed line of credit and$25.0 million under the AEL&P committed line of credit. After considering the impacts of COVID-19, with our$400.0 million credit facility that expires inApril 2022 and AEL&P's$25.0 million credit facility that expires inNovember 2024 , we believe that we have adequate liquidity to meet our needs for the next 12 months.
Review of Cash Flow Statement
Operating Activities
Net cash provided by operating activities was$282.5 million for the nine months endedSeptember 30, 2020 compared to$340.5 million for the nine months endedSeptember 30, 2019 . The decrease in net cash provided by operating activities primarily relates to a termination fee of$103.0 million (less transaction costs and income taxes of$19.7 million (pre-tax) and$15.7 million , respectively, in 2019) received in 2019 upon the termination of the Hydro One transaction. In addition, we settled interest rate swaps during 2020 and paid a net amount of$33.5 million , compared to a net cash paid of$13.3 million for interest rate swap settlements in 2019. The above decrease in net cash provided by operating activities was partially offset by power and natural gas deferrals which decreased during 2020 due to lower natural gas prices during the year, which decreased cash flows by$6.5 million as compared to a decrease to operating cash flows of$45.8 million in 2019. As compared to 2019, certain net current assets and liabilities decreased by$41.6 million . 64
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION Investing Activities Net cash used in investing activities was$301.0 million for the nine months endedSeptember 30, 2020 , compared to$320.3 million for the nine months endedSeptember 30, 2019 . During the nine months endedSeptember 30, 2020 , we paid$297.8 million for utility capital expenditures compared to$321.0 million for the nine months endedSeptember 30, 2019 . Also, during 2020, we received proceeds from the sale of equity investments (net of cash sold and amounts held in escrow) of$6.6 million . Financing Activities Net cash provided by financing activities was$93.3 million for the nine months endedSeptember 30, 2020 , compared to cash used of$20.4 million for the nine months endedSeptember 30, 2019 . During the third quarter of 2020, we issued long-term debt of$165.0 million . See "Note 10 of Notes to Condensed Consolidated Financial Statements" for further discussion on the issuance of long-term debt. In addition, during the nine months endedSeptember 30, 2020 we decreased our short-term borrowings by$35.8 million as compared to an increase in our short-term borrowings of$17.0 million for the nine months endedSeptember 30, 2019 .
Capital Resources
Our consolidated capital structure, including the current portion of long-term debt and short-term borrowings consisted of the following as ofSeptember 30, 2020 andDecember 31, 2019 (dollars in thousands): September 30, 2020 December 31, 2019 Percent Percent Amount of total Amount of total Current portion of long-term debt and leases (1)$ 59,122 1.4 %$ 58,928 1.4 % Short-term borrowings 150,000 3.4 % 185,800 4.4 % Long-term debt to affiliated trusts 51,547 1.2 % 51,547 1.2 % Long-term debt and leases (1) 2,129,606 48.7 % 1,961,083 46.7 % Total debt 2,390,275 54.7 % 2,257,358 53.8 %Total Avista Corporation shareholders' equity 1,982,851 45.3 % 1,939,284 46.2 % Total$ 4,373,126 100.0 %$ 4,196,642 100.0 %
(1) Lease amounts of
respectively, are included in other current liabilities and other non-current
liabilities and deferred credits on the Condensed Consolidated Balance
Sheets.
Our shareholders' equity increased$43.6 million during the first nine months of 2020 primarily due to net income and the issuance of common stock, partially offset by dividends.
We need to finance capital expenditures and acquire additional funds for operations from time to time. The cash requirements needed to service our indebtedness, both short-term and long-term, reduce the amount of cash flow available to fund capital expenditures, purchased power, fuel and natural gas costs, dividends and other requirements.
Committed Lines of Credit
Avista Corp. has a committed line of credit with various financial institutions in the total amount of$400.0 million . During the second quarter, we amended and extended, for one additional year, the revolving line of credit agreement for a revised expiration date ofApril 2022 , with the option to extend for an additional one year period. The committed line of credit is secured by non-transferable first mortgage bonds we issued to the agent bank that would only become due and payable in the event, and then only to the extent, that we default on our obligations under the committed line of credit. TheAvista Corp. credit facility contains customary covenants and default provisions, including a covenant which does not permit our ratio of "consolidated total debt" to "consolidated total capitalization" to be greater than 65 percent at any time. As ofSeptember 30, 2020 , we were in compliance with this covenant with a ratio of 54.7 percent. 65
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION
AEL&P has a
The AEL&P credit facility contains customary covenants and default provisions including a covenant which does not permit the ratio of "consolidated total debt at AEL&P" to "consolidated total capitalization at AEL&P" (including the impact of the Snettisham obligation) to be greater than 67.5 percent at any time. As ofSeptember 30, 2020 , AEL&P was in compliance with this covenant with a ratio of 52.4 percent.
Balances outstanding and interest rates of borrowings under
2020 2019
Borrowings outstanding at end of period$ 50,000 $
169,000
Letters of credit outstanding at end of period$ 25,573 $ 18,603 Maximum borrowings outstanding during the period$ 257,000 $ 190,000 Average borrowings outstanding during the period$ 178,537 $ 114,331 Average interest rate on borrowings during the period 1.28 % 3.31 % Average interest rate on borrowings at end of period 1.20 % 3.26 % As ofSeptember 30, 2020 ,Avista Corp. and its subsidiaries were in compliance with all of the covenants of their financing agreements, and none ofAvista Corp.'s subsidiaries constituted a "significant subsidiary" as defined inAvista Corp.'s committed line of credit.
In
The credit agreement contains customary covenants and default provisions, including a covenant not to permit the ratio of "consolidated total debt" to "consolidated total capitalization" ofAvista Corp. to be greater than 65 percent at any time. As ofSeptember 30, 2020 , we were in compliance with this covenant with a ratio of 54.7 percent.
Liquidity Expectations
During the third quarter of 2020, we issued$165.0 million of long-term debt (see "Note 10 of the Notes to Condensed Consolidated Financial Statements). No further debt issuances are planned for 2020. During 2020, we expect to issue about$70.0 million of equity (including$53.4 million issued during the nine months endedSeptember 30, 2020 ) to maintain an appropriate capital structure. We intend to use the proceeds from our debt and equity issuances to refinance maturing long-term debt, fund planned capital expenditures and for other general corporate purposes. After considering the impacts of COVID-19, including the expectation of lower net operating cash flows, and the issuances of long-term debt and equity during 2020, we expect net cash flows from operations, together with cash available under our committed lines of credit to provide adequate resources to fund capital expenditures, dividends, and other contractual commitments.
Capital Expenditures
We are making capital investments to enhance service and system reliability for our customers and replace aging infrastructure. Our estimated capital expenditures increased for 2020 from$405 million to$430 million due to higher growth and storm related capital. Our estimates for 2021 and 2022 have not materially changed during the nine months endedSeptember 30, 2020 . See the 2019 Form 10-K for further information on our expected capital expenditures. 66
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION
Off-Balance Sheet Arrangements
As ofSeptember 30, 2020 , we had$25.6 million in letters of credit outstanding under our$400.0 million committed line of credit, compared to$21.5 million as ofDecember 31, 2019 . Pension PlanAvista Utilities In the nine months endedSeptember 30, 2020 we contributed$22.0 million to the pension plan and we do not expect further contributions in 2020. We expect to contribute a total of$128.0 million to the pension plan in the period 2021 through 2024, with annual contributions of$42.0 million in 2021 and 2022 and$22.0 million in 2023 and 2024. The final determination of pension plan contributions for future periods is subject to multiple variables, most of which are beyond our control, including changes to the fair value of pension plan assets, changes in actuarial assumptions (in particular the discount rate used in determining the benefit obligation), or changes in federal legislation. We may change our pension plan contributions in the future depending on changes to any variables, including those listed above.
See "Note 6 of the Notes to Condensed Consolidated Financial Statements" for additional information regarding the pension plan.
Contractual Obligations
Our future contractual obligations have not materially changed during the nine
months ended
• in
maturity date of April 2021 . See "Note 9 of the Notes to Condensed
Consolidated Financial Statements."
• in
an expiration date of
Consolidated Financial Statements."
• on
percent first mortgage bonds due in 2050 pursuant to a bond purchase
agreement with institutional investors in the private placement market. See
"Note 10 of the Notes to Condensed Consolidated Financial Statements."
See the 2019 Form 10-K for our contractual obligations.
Environmental Issues and Contingencies
Our environmental issues and contingencies disclosures have not materially
changed during the nine months ended
Coal Ash Management/Disposal
In 2015, the EPA issued a final rule regarding coal combustion residuals (CCRs), also termed coal combustion byproducts or coal ash. The CCR rule has been the subject of ongoing litigation. InAugust 2018 , the D.C. Circuit struck down provisions of the rule.Colstrip , of which we are a 15 percent owner of Units 3 & 4, produces this byproduct. InDecember 2019 , a proposed revision to the rule was published in theFederal Register to address the D.C. Circuit's decision. The rule includes technical requirements for CCR landfills and surface impoundments under Subtitle D of the Resource Conservation and Recovery Act, the nation's primary law for regulating solid waste. TheColstrip owners developed a multi-year compliance plan to address the CCR requirements with existing state obligations expressed largely by the 2012 Administrative Order on Consent (AOC) withMontana Department of Environmental Quality (MDEQ). These requirements continue despite the 2018 federal court ruling. The AOC requires MDEQ provide an ongoing public process which recently approved the Remedy and Closure plans for the three major areas ofColstrip . The AOC also requires theColstrip owners to provide financial assurance primarily in the form of surety bonds, to secure each owner's pro rata share of various anticipated closure and remediation obligations.Avista Corp. is responsible for 67
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION its share of two major areas; the Plant Site Area and theEffluent Holding Pond (EHP) Area. Generally, the plans include the removal of Boron, Chloride, and Sulfate from the groundwater, closure of the existing ash storage ponds, and installation of a new water treatment system to convert the facility to a dry ash storage.Avista Corp. has posted three surety bonds totaling approximately$23 million . This amount will be updated annually, decreasing over time as remediation activities are completed.
Washington Legislation and Regulatory Actions
GHG Reduction Targets
TheState of Washington has adopted non-binding targets to reduce GHG (Greenhouse Gas ) emissions. The State enacted its targets with an expectation of reaching the targets through a combination of renewable energy standards, eventual carbon pricing mechanisms, such as cap and trade regulation or a carbon tax, and assorted "complementary policies." However, no specific reductions are mandated as yet. The State's targets, originally enacted in 2008, have been evaluated by state institutions against the aims of the Paris Climate Accord of 2016, which include limiting the increase in the global average temperatures to at least below 2 degrees Celsius above pre-industrial levels and pursuing efforts to restrict the temperature increase to 1.5 degrees Celsius above pre-industrial levels. In 2020, the Legislature adjusted the state's targets, accordingly. UnderWashington law, GHG emissions should be reduced to being 95% below 1990 levels (or to five million metric tons) by 2050, with the state achieving net zero emissions by that year. We intend to seek recovery of any new costs associated with these reduction targets, or any new reduction targets, through the regulatory process.
Oregon Legislation and Regulatory Actions
GHG Reduction Targets
TheState of Oregon has adopted non-binding targets to reduce GHG emissions. The State enacted its targets with an expectation of reaching the targets through a combination of renewable energy standards, eventual carbon pricing mechanisms, such as cap and trade regulation or a carbon tax, and assorted "complementary policies." However, no specific reductions are mandated as yet. The State's targets have been evaluated by state institutions against the aims of theParis Climate Accord of 2016, which include limiting the increase in global average temperatures to at least below 2 degrees Celsius above pre-industrial levels and pursuing efforts to restrict the temperature increase to 1.5 degrees Celsius above pre-industrial levels. InMarch 2020 ,Oregon GovernorKate Brown issued Executive Order No. 20-04, "Directing State Agencies to Take Actions to Reduce and Regulate Greenhouse Gas Emissions." The Executive Order launches rulemaking proceedings for everyOregon agency with jurisdiction over greenhouse gas-related matters, with the aim of reducingOregon's overall GHG emissions to 80% below 1990 levels by 2050.Oregon agencies, including theDepartment of Environmental Quality (DEQ) and thePublic Utility Commission , issued reports discussing general intent to carry out the Executive Order. DEQ is tasked with developing rules for a cap and reduce program that would apply to Avista's gas distribution business inOregon . The agency initiated informal and broad stakeholder consultation inJune 2020 , which will continue during the remainder of 2020 and shift into formal rulemaking. We cannot reasonably predict what regulatory proceedings will arise from the Executive Order, nor how the state legislature may undertake additional requirements or revise the State's targets in the future. We intend to seek recovery of any new costs associated with these reduction targets, or any new reduction targets, through the regulatory process.
Cabinet Gorge Total Dissolved Gas Abatement Plan
Dissolved atmospheric gas levels (referred to as "Total Dissolved Gas " or "TDG") in theClark Fork River exceed state ofIdaho and federal water quality numeric standards downstream ofCabinet Gorge particularly during periods when excess river flows must be diverted over the spillway. Under the terms of the Clark Fork Settlement Agreement as incorporated inAvista Corp.'s FERC license for theClark Fork Project ,Avista Corp. works in consultation with agencies, tribes and other stakeholders to address this issue through structural modifications to the spillgates, monitoring and analysis. After extensive testing, Clark Fork Settlement Agreement stakeholders have agreed that no further spillway modifications are justified. For the remainder of the FERC License term,Avista Corp. will continue to mitigate remaining impacts of TDG while considering the potential for new approaches to further reduce TDG. 68
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION The Company continues to work with stakeholders to determine the degree to which TDG abatement reduces future mitigation obligations. The Company has sought, and intends to continue to seek recovery, through the ratemaking process, of all operating and capitalized costs related to this issue.
Hazardous Air Pollutants (HAPs)
InApril 2016 , the Mercury Air Toxic Standards (MATS), an EPA rule for coal-and oil-fired sources, became effective for allColstrip units.Colstrip has already implemented applicable MATS control measures to comply with the MATS rule, and continues to monitor potential changes in the rule to determine additional compliance obligations, if any.Colstrip performs compliance assurance stack testing on a quarterly basis to meet the MATS site-wide limitation for Particulate Matter (PM) emissions (0.03 lbs./MMBtu). InJune 2018 , theMontana Department of Environmental Quality (MDEQ) was notified of a PM emission deviation byTalen Montana, LLC (Talen), the plant operator, for the testing performed inJune 2018 . As a result, Unit 3 was promptly removed from service. For similar reasons, Unit 4 was removed from service inJune 2018 . Talen proposed, and the MDEQ acknowledged, that limited operation of Units 3 & 4 for the evaluation of a corrective action and/or data gathering related to potential corrective action was a prudent approach to solving the issue. An extensive inspection was conducted including: the coal supply, coal mills, boiler, combustion, ductwork, air preheater, scrubbers, and the stack. Talen implemented cleaning, adjustments, troubleshooting, testing, and other corrective actions. As a part of the corrective action, new flow balancing plates were installed in all Unit 3 & 4 scrubber vessels to further enhance PM removal efficiency. PM testing inSeptember 2018 on Units 3 & 4 demonstrated compliance with the MATS. Both of these compliance tests were witnessed by the MDEQ. With the passing of the PM testing with MATS compliance, Talen, the Colstrip Operator returned both Units 3 & 4 to service inSeptember 2018 . Due to theJune 2018 failure to meet the MATS standard, Colstrip Units 3 & 4 were subject to potential MDEQ enforcement action. In lieu of such an action, inDecember 2019 , Talen and MDEQ entered a Stipulated Consent Decree providing for a cash penalty, partially offset by an agreement by Talen to fund specified Supplemental Environmental Projects, as well as additional monitoring activities. The total amount of the cash penalty allocable to the Company is not material. However, PacifiCorp, PSE, and the Company engaged in a consolidated proceeding before the WUTC to determine the recoverability of replacement power costs incurred during the period that Units 3 & 4 were out of service. InMarch 2020 , the Company received an order from the WUTC, which, among other outcomes, rebated approximately$3 million that was disallowed by the Commission for the cost of replacement power during the unplanned outage atColstrip in 2018.
Colstrip Coal Contract
Colstrip , which is operated by Talen, is supplied with fuel from adjacent coal reserves under coal supply and transportation agreements. The contract for coal supply extended through 2019. Several of the co-owners ofColstrip , including the Company, have since negotiated an extension to the coal contract that runs throughDecember 31, 2025 . InJanuary 2020 , the Staff of the WUTC submitted a Petition to Initiate Joint Investigation to the WUTC to investigate the contract. In their petition, the WUTC Staff is proposing one proceeding involving the three joint owners of Colstrip Units 3 & 4 and the focus of their proposed investigation is to review the overall prudency of the new contract and any production tax credits associated with the contract. InMarch 2020 , the WUTC denied the WUTC Staff's position.
PSE Sale of Its Share of Colstrip Unit 4
InDecember 2019 , PSE announced that it had entered into an agreement to sell its share of Colstrip Unit 4 toNorthWestern Energy , along with certain related transmission rights and assets. The agreement was subject to approval by theWUTC andMontana Public Service Commission . InOctober 2020 , the parties terminated the agreement.
Wildfire Resiliency Plan
We are implementing additional measures to enhance our ability to mitigate the
potential for, and impact of, wildfires within our service territories. Building
on prevention and response strategies that have been in place many years, we
created a new
69
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION
comprehensive 10-year Wildfire Resiliency Plan that includes improved defense strategies and operating practices for a more resilient system.
We have spent the last year developing the Wildfire Resiliency Plan through a series of internal workshops, industry research and engagement with state and local fire agencies. Improvements to infrastructure and operational practices were identified as key components to the plan. These key components are categorized into the following categories: grid hardening, vegetation management, situational awareness, operations and emergency response, and worker and public safety. We expect to spend approximately$330 million implementing the plan components over the life of the 10-year plan. We filed deferred accounting requests inWashington andIdaho to defer the cost of the wildfire resiliency plan and seek recovery in future rate filings.
See "Note 16 of the Notes to Condensed Consolidated Financial Statements" for further discussion on wildfires.
Request for Proposals for Renewable Energy
We are seeking proposals from renewable energy project developers who are capable of constructing, owning, and operating up to 120 average MWs (aMWs) whether through one or multiple proposals with a minimum net annual output of 20 aMW. We are not considering a self-build option for this facility or facilities.
Our intent is to secure the output from renewable generation resources, including electricity, capacity and associated environmental attributes. Our interest in acquiring new renewable energy resources is to offset market purchases and fossil-fuel thermal generation. This is consistent with our 2020 Integrated Resource Plan which identifies that the utility will consider acquiring additional resources if such resources have lower long-term cost than electric market alternatives.
See the 2019 Form 10-K for further discussion of environmental issues and contingencies.
Enterprise Risk Management
The material risks to our businesses, and our mitigation process and procedures to address these risks, were discussed in our 2019 Form 10-K and have not materially changed during the nine months endedSeptember 30, 2020 , other than the changes noted due to COVID-19. See the 2019 Form 10-K.
Financial Risk
Our financial risks have not materially changed during the nine months endedSeptember 30, 2020 , other than the changes noted due to COVID-19. Refer to the 2019 Form 10-K. The financial risks included below are required interim disclosures, even if they have not materially changed fromDecember 31, 2019 . 70
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION Interest Rate Risk We use a variety of techniques to manage our interest rate risks. We have an interest rate risk policy and have established a policy to limit our variable rate exposures to a percentage of total capitalization. Additionally, interest rate risk is managed by monitoring market conditions when timing the issuance of long-term debt and optional debt redemptions and establishing fixed rate long-term debt with varying maturities. See "Note 5 of the Notes to Condensed Consolidated Financial Statements" for a summary of our interest rate swap derivatives outstanding as ofSeptember 30, 2020 andDecember 31, 2019 and the amount of additional collateral we would have to post in certain circumstances. In addition, see "Regulatory Matters" for a discussion of commitments we made inOregon surrounding the independent review of our interest rate hedging practices.
Credit Risk
Avista Utilities' contracts for the purchase and sale of energy commodities can require collateral in the form of cash or letters of credit. As ofSeptember 30, 2020 , we had no cash deposited as collateral and letters of credit of$21.5 million outstanding related to our energy derivative contracts. Price movements and/or a downgrade in our credit ratings could impact further the amount of collateral required. See "Credit Ratings" in the 2019 Form 10-K for further information. For example, in addition to limiting our ability to conduct transactions, if our credit ratings were lowered to below "investment grade" based on our positions outstanding atSeptember 30, 2020 (including contracts that are considered derivatives and those that are considered non-derivatives), we would potentially be required to post the following additional collateral (in thousands):September 30, 2020 Additional collateral taking into account contractual thresholds $
3,376
Additional collateral without contractual thresholds 3,906 Under the terms of interest rate swap derivatives that we enter into periodically, we may be required to post cash or letters of credit as collateral depending on fluctuations in the fair value of the instrument. As ofSeptember 30, 2020 , we had interest rate swap derivatives outstanding with a notional amount totaling$175.0 million and we had cash deposited as collateral in the amount of$10.1 million and no letters of credit outstanding for these interest rate swap derivatives. If our credit ratings were lowered to below "investment grade" based on our interest rate swap derivatives outstanding atSeptember 30, 2020 , we would potentially be required to post the following additional collateral (in thousands):September 30, 2020 Additional collateral taking into account contractual thresholds $
17,220
Additional collateral without contractual thresholds 56,498 Energy Commodity Risk Our energy commodity risks have not materially changed during the nine months endedSeptember 30, 2020 , except as discussed below and the COVID-19 related risks. See the 2019 Form 10-K. The following table presents energy commodity derivative fair values as a net asset or (liability) as ofSeptember 30, 2020 that are expected to settle in each respective year (dollars in thousands). There are no expected deliveries of energy commodity derivatives after 2023. Purchases Sales Electric Derivatives Gas Derivatives Electric Derivatives Gas Derivatives Year Physical (1) Financial (1)
Physical (1) Financial (1) Physical (1) Financial (1)
Physical (1) Financial (1) Remainder 2020 $ (4 )$ 1,468 $ (610 ) $ 8,898$ (183 ) $ (3,045 ) $ (1,281 ) $ (5,805 ) 2021 - 386 332 14,204 - 277 (2,280 ) (10,483 ) 2022 - - 343 3,401 - - - (884 ) 2023 - - - 230 - - - - 71
--------------------------------------------------------------------------------
Table of ContentsAVISTA CORPORATION The following table presents energy commodity derivative fair values as a net asset or (liability) as ofDecember 31, 2019 that are expected to be delivered in each respective year (dollars in thousands). There are no expected deliveries of energy commodity derivatives after 2022. Purchases Sales Electric Derivatives Gas Derivatives Electric Derivatives Gas Derivatives Year Physical (1) Financial (1) Physical (1) Financial (1) Physical (1) Financial (1) Physical (1) Financial (1) 2020 $ 19$ 2,063 $ (895 ) $ 10,929 $ (422 ) $ (7,448 ) $ (1,634 ) $ (8,922 ) 2021 - - 15 2,666 - (26 ) (1,187 ) (1,941 ) 2022 - - 35 180 - - - (5 )
(1) Physical transactions represent commodity transactions in which we will take
or make delivery of either electricity or natural gas; financial transactions
represent derivative instruments with delivery of cash in the amount of the
benefit or cost but with no physical delivery of the commodity, such as
futures, swap derivatives, options, or forward contracts.
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 are delivered and will be included in the various deferral and recovery mechanisms (ERM, PCA, and PGAs), or in the general rate case process, and are expected to eventually be collected through retail rates from customers.
© Edgar Online, source
