Avista Corporation 10-Q Summary: Quarter Ended March 31, 2003
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2003. Avista Corporation is an energy company engaged in the generation, transmission, and distribution of energy. Its operations are divided into four segments: Avista Utilities (regulated electric and natural gas), Energy Marketing and Resource Management (non-regulated trading), Information and Technology, and Other. The company operates primarily in the western United States.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2003 | Q1 2002 |
|---|---|---|
| Operating Revenues | $311,871 | $326,822 |
| Income from Continuing Operations | $17,323 | $15,520 |
| Net Income | $16,133 | $11,100 |
| Earnings Per Share (Diluted) | $0.32 | $0.22 |
| Cash Provided by Operating Activities | $109,908 | $180,924 |
| Total Assets | $3,573,021 | $3,614,133 |
| Total Debt (Long-term + Current) | $959,515 | $1,004,536 |
| Cash and Cash Equivalents | $222,071 | $186,369 |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased by $15.0 million (4.6%) primarily due to a $25.9 million decrease in Avista Utilities revenues. This was driven by lower retail natural gas sales (due to rate decreases and warmer weather) and lower electric sales volume, partially offset by a $35.6 million increase in Energy Marketing revenues.
- Profitability Increase: Net income increased by $5.0 million (45.3%) and EPS increased by $0.10. This improvement was driven by a significant increase in net income from the Energy Marketing segment ($13.1 million vs. $8.2 million) and a reduction in interest expense ($5.4 million decrease) due to debt repurchases.
- Accounting Change Impact: The company recorded a cumulative effect of accounting change charge of $1.2 million (net of tax) related to the transition from EITF Issue No. 98-10 to SFAS No. 133 for energy trading contracts. This transition, combined with an $8.3 million gain from settling Enron-related positions, positively impacted Energy Marketing earnings.
- Debt Reduction: Total debt decreased by approximately $45 million due to the repurchase of $15.5 million in long-term debt during the quarter and a reduction in short-term borrowings.
Guidance, Outlook, and Risks
- 2003 Earnings Guidance: Management expects consolidated earnings in the range of $0.80 to $1.00 per diluted share for 2003 (excluding cumulative effects of accounting changes). This includes estimates of $0.60–$0.80 for Utilities, $0.20–$0.30 for Energy Marketing, and a loss of $0.10–$0.15 for Information and Technology.
- Regulatory Risks: The company is subject to ongoing FERC investigations regarding western energy markets (2000–2001). While an agreement in principle was reached in late 2002 stating no evidence of misconduct, final certification is pending. Potential refund proceedings in California and the Pacific Northwest remain a risk, though the company believes reserves are sufficient.
- Market Risks: Earnings volatility is expected to increase due to the new SFAS No. 133 accounting rules for derivatives. The company faces commodity price risks, credit risks from counterparties, and hydroelectric generation risks (forecasted at 93% of normal for 2003).
- Off-Balance Sheet Consolidation: Effective July 1, 2003, the company must consolidate WP Funding LP (Rathdrum CT), adding approximately $54.5 million in debt to the balance sheet.
Investor Verification Checklist
- FERC Investigation Status: Verify the final resolution of the FERC inquiry and any potential refund liabilities in California and the Pacific Northwest.
- Hydroelectric Forecasts: Monitor streamflow conditions and their impact on deferred power costs and the need for expensive purchased power.
- Debt Consolidation: Confirm the impact of the July 1, 2003 consolidation of WP Funding LP on leverage ratios and debt covenants.
- Energy Trading Volatility: Assess the quarter-to-quarter earnings volatility resulting from the SFAS No. 133 mark-to-market accounting for derivatives.
- Enron Settlements: Review the final terms and financial impact of the settlements with Enron affiliates, which provided an $8.3 million revenue boost in Q1 2003.