Avista Corporation 10-Q Summary: Period Ended September 30, 2003
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2003, for Avista Corporation, an energy company engaged in the generation, transmission, and distribution of electricity and natural gas. The company operates through four primary segments: Avista Utilities (regulated utility operations), Energy Marketing and Resource Management (non-regulated trading and asset optimization), Avista Advantage (facility intelligence services), and Other. The filing includes unaudited consolidated financial statements and management discussion.
Key Financial Metrics
| Metric (Dollars in thousands) | Three Months Ended Sept 30, 2003 | Nine Months Ended Sept 30, 2003 |
|---|---|---|
| Operating Revenues | $224,377 | $754,651 |
| Income from Continuing Operations | $4,386 | $35,541 |
| Net Income | $4,320 | $29,421 |
| Net Cash Provided by Operating Activities | N/A | $120,695 |
| Total Assets | $3,361,408 | $3,361,408 |
| Total Debt (Short-term + Long-term) | $915,331 | $915,331 |
| Cash and Cash Equivalents | $187,184 | $187,184 |
| Earnings Per Share (Diluted) | $0.09 | $0.58 |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased 12.2% ($24.4 million) for the three months ended September 30, 2003, compared to the same period in 2002. This was driven by a 71% increase in Energy Marketing revenues and an 11% increase in Avista Utilities revenues.
- Profitability Improvement: Net income for the three months turned positive at $4.3 million, compared to a net loss of $1.6 million in the prior year quarter. For the nine months, net income rose to $29.4 million from $19.8 million.
- Segment Performance:
- Avista Utilities: Net income improved to $0.9 million (Q3) and $19.9 million (9M) due to increased gross margins and lower interest expense, partially offset by higher operating costs.
- Energy Marketing: Net income increased significantly to $4.8 million (Q3) and $21.1 million (9M), aided by improved gross margins and a settlement with Enron affiliates.
- Discontinued Operations: Losses from discontinued operations (Avista Labs) decreased significantly compared to the prior year, which included losses from Avista Communications.
- Debt Reduction: The company repurchased $52.5 million of long-term debt during the nine-month period. Total debt decreased slightly from year-end 2002 levels.
- Accounting Changes: The adoption of SFAS No. 150 reclassified $100 million of mandatorily redeemable preferred trust securities and $31.5 million of preferred stock as liabilities. Additionally, a cumulative effect of accounting change charge of $1.2 million (net of tax) was recorded related to the transition to SFAS No. 133 for energy trading contracts.
Guidance, Outlook, and Risks
- Regulatory Matters:
- Power Cost Deferrals: Total deferred power costs were $158.7 million as of September 30, 2003. Regulatory agencies (WUTC, IPUC) are reviewing the prudence of these costs, with potential disallowances of $2.0–$2.6 million (Coyote Springs 2 delay) and $14.0 million (natural gas sales losses) in Washington, and $5.9 million in Idaho.
- Natural Gas Benchmark: The Washington Utilities and Transportation Commission (WUTC) staff recommended terminating the Natural Gas Benchmark Mechanism in January 2004, which could shift procurement operations back to Avista Utilities.
- Legal Proceedings:
- FERC Investigation: An administrative law judge certified an agreement in resolution regarding the FERC investigation into western energy markets, finding no evidence of improper trading by Avista. The agreement was forwarded to FERC commissioners for final approval.
- Class Action Litigation: A consolidated securities class action lawsuit alleges violations of federal securities laws regarding risk management and market manipulation. The company filed a motion to dismiss in October 2003.
- California Refunds: The company believes it has sufficient reserves for potential California refunds and opposes retroactive refund claims in the Pacific Northwest.
- Market Risks: The company faces commodity price risk, credit risk (counterparty defaults), and liquidity risks. Avista Energy utilizes Value-at-Risk (VAR) models to manage trading exposure. The company's credit rating remains below investment grade (BB+/Ba1).
- Outlook: Management intends to focus on improving cash flows, controlling costs, and reducing debt to restore an investment-grade credit rating. Hydroelectric generation for 2003 is forecast at 90% of normal.
Key Facts for Investor Verification
- Deferred Cost Recoverability: Verify the status of regulatory reviews regarding the $158.7 million in deferred power costs and the potential disallowance of specific costs in Washington and Idaho.
- FERC Settlement Finality: Confirm the final approval status of the FERC agreement in resolution to ensure no further liability from the western energy market investigation.
- Debt Covenants: Monitor compliance with the 65% debt-to-capitalization covenant and the 1.6x EBITDA-to-interest expense covenant, particularly given the below-investment-grade credit rating.
- Enron Settlement Impact: Assess the long-term impact of the $8.3 million positive impact from Enron affiliate settlements on future earnings volatility.
- Hydroelectric Forecast: Track actual streamflow conditions against the 90% of normal forecast for 2003, as this directly impacts power purchase costs and deferred balances.