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Summary Power generation mix is nearly all clean energy. Dividend history is solid, management guidance for 4-6% growth going forward. Only moderate leverage; Avista hasn’t been on a borrowing spree like most utilities. Shares are just simply one of the top picks in the utility sector. Set it and forget it. Avista Corporation (NYSE: AVA ) primarily operates as a regulated utility business, with the majority of revenue derived from providing electric and natural gas services to customers in Washington, Idaho, and Oregon. While the company does serve some customers in Montana and Alaska (via the AERC acquisition), these operations, along with the non-utility businesses, are fairly immaterial to company earnings. Despite favorable generation capacity, healthy dividend growth, and favorable rate case filings, shares have largely tracked broader utility sector results. Are shares poised to outperform in the future? Favorable Power Generation Bucking the trend of utilities that are woefully behind the curve in emissions standards, Avista’s 1,800MW of generation capacity currently consists of 56% renewables and 35% clean burning natural gas. It isn’t a surprise that the company consistently wins awards for being one of the greenest power producers in the United States. This is a big positive for shareholders. My attraction to Avista and companies with such strong renewables mixes is not born out of liberal thinking but a mere acknowledgement that it is extremely unlikely that current federal and state regulations regarding emissions standards get dialed back. The company’s power generation portfolio simply makes regulatory overhang due to increased renewable standards from state regulators and the federal government a non-issue. If I’m an investor looking for steady income, I don’t want to see surprise jumps in capital expenditures to bring plants into compliance or bad press from dirty power generation [think PLM Resources’ San Juan Generating Station (NYSEMKT: PLM ) or Duke Energy’s (NYSE: DUK ) coal ash basin spills]. Fact is Avista’s power generation mix greatly exceeds even the strictest of mandates, including those set for implementation in 2035 or later. This should help investors sleep easier at night. Operational Results (click to enlarge) Utility revenue has been moving up slowly, primarily based on growth in residential and commercial consumers, while revenue from industrial customers has been weakening since the expiration and subsequent renewal at lower rates of some large customer contracts recently. Revenue can be volatile. This is because Avista often chooses to sell its excess natural gas when current wholesale market prices are below the cost of power generation using its natural gas plants. Years that see these sales generally see higher revenue (due to these sales) but lower profit and operating margins. Investors can use 2014 versus 2013 as an example. In 2014, Avista sold $43M less natural gas in the open market ($84M in sales versus $127M in 2013). So while revenue only expanded marginally (2.2%), operating income grew 10% due in part to better margins. Additionally, shrinking operations and maintenance costs in spite of growing revenues is also a compelling sign to me that management is keeping a close eye on costs. With incremental revenue gains being hard-fought in the utility sector, any expense reductions that yield operational efficiency gains should be lauded. Money In, Money Out (click to enlarge) Like I do with all utility analysis, I look to make sure that cash being spent does not greatly outweigh cash being generated from operations. Utilities in general have been on a spending spree in the past few years due to looming regulatory burdens and record low interest rates. Debt issuance has been both necessary and coincidentally quite cheap, leading utility management to feat on the smorgasbord of easy money. Avista’s overspending and subsequent debt issuance has been relatively mild in comparison, especially considering that the company raised $245M in cash from the sale of the Ecova business in 2014, with the majority of those proceeds used to offset common stock dilution. Total long-term debt raised between 2011 to the current period has been just $250M. Because of this, Avista’s net debt/EBITDA stands at 3.3x, making it one of the least leveraged utilities I’ve analyzed recently. Operational cash flow should grow during 2015-2017 through rate recovery increases while capital expenditures flatten in the $350M range. This should decrease the deficit we see in the cash flow analysis. Overall, I don’t see an alarming trend here that should worry investors. Conclusion With a current dividend yield of approximately 4%, shares are trading slightly higher than historical averages by approximately 5%. While many investors would elect to wait it out for shares to drop, in the grand scheme of things an investment strategy like that can make you miss out on some valuable opportunities. Establishing a half position and electing to buy on dips might be the better strategy. In my opinion, Avista’s diversified utility business is one of the safest available options in the publicly-traded utility sector. Shares, however, don’t seem to carry any real premium for this value. While I don’t own shares (I instead own shares in Calpine Corporation (NYSE: CPN ) and AES Corporation (NYSE: AES ) given my heavier risk appetite than most), I certainly would if I was an income investor, even at these prices. Management’s guidance of 4-6% dividend growth in the years to come is both manageable and ahead of most utility peers. I’ve looked at many picks in the utility sector in the current market, and very few of them appear to trade at or below fair value. Avista isn’t one of them. If you’re long, congratulations on holding a winner. If you aren’t and are an income investor, you should consider it. Scalper1 News
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