Business Context and Reporting Period
Company: Avista Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2000
Business Overview: Avista operates as an energy, information, and technology company. Its primary segments include Avista Utilities (regulated electric and natural gas services), Energy Trading and Marketing (wholesale trading), Information and Technology (e-commerce and fuel cells), and Avista Ventures (investment and portfolio management).
Key Financial Metrics
| Metric (in thousands) | Q3 2000 | Q3 1999 | 9 Months 2000 | 9 Months 1999 |
|---|---|---|---|---|
| Operating Revenues | $2,864,305 | $3,718,109 | $5,599,693 | $6,366,047 |
| Net Income | $34,540 | $27,613 | $23,573 | $55,510 |
| Income Available for Common Stock | $33,932 | $22,273 | $446 | $39,403 |
| Earnings Per Share (Diluted) | $0.72 | $0.52 | $0.01 | $0.98 |
| Cash and Cash Equivalents | $78,490 | $40,041 (Dec 31, 1999) | N/A | |
| Total Long-Term Debt | $743,147 | $718,203 (Dec 31, 1999) | N/A | |
| Short-Term Borrowings | $118,100 | $2,530 (Dec 31, 1999) | N/A |
Segment Performance (9 Months 2000 vs 1999):
- Energy Trading & Marketing: Income available for common stock improved from a loss of $17.4 million to a profit of $85.8 million, driven by a well-positioned portfolio in volatile western markets.
- Avista Utilities: Recorded a loss of $65.7 million (available for common stock) compared to income of $25.4 million in 1999, primarily due to unprecedented wholesale power price spikes and a short trading position.
- Information & Technology: Loss increased to $18.7 million from $4.5 million due to continued investment in growth.
- Avista Ventures: Loss of $0.98 million compared to income of $35.9 million in 1999 (which included significant transactional gains from asset sales).
Material Changes vs. Prior Period
- Revenue Decline: Consolidated operating revenues decreased 20% in Q3 2000 and 12% for the nine months ended Sept 30, 2000, compared to 1999. This was largely due to Avista Energy closing its Eastern operations and refocusing on the West, reducing transaction volumes.
- Utility Losses: Avista Utilities incurred significant losses in the first nine months of 2000 due to wholesale power prices averaging 102% higher than the prior year. A short position in wholesale trading during Q2 2000 exacerbated these losses.
- Preferred Stock Conversion: In February 2000, all Series L Preferred Stock was converted to common stock. This resulted in a one-time charge of $21.3 million to preferred dividend requirements, significantly impacting the nine-month earnings available for common stock.
- Asset Base Expansion: Total assets increased from $3.7 billion (Dec 31, 1999) to $6.3 billion (Sept 30, 2000), driven by a $2.5 billion increase in Energy Trading and Marketing assets due to mark-to-market valuation of commodity positions.
Guidance, Outlook, Risks, and Contingencies
Outlook: Management expects slightly above breakeven earnings per share on a diluted basis for the fourth quarter of 2000. This projection accounts for continued investment in Information and Technology, ongoing high power costs, and potential benefits from price volatility in western power markets.
Liquidity: The Company anticipates satisfying all cash requirements through the remainder of 2000. Cash flows were impacted by higher power costs and cash collateral requirements for trading counterparties. Short-term borrowings increased to $118.1 million to manage liquidity.
Key Risks and Contingencies:
- Securities Litigation: Multiple class-action lawsuits were filed in July and August 2000 alleging misstatements regarding trading activities and risk management. The Company denies liability and intends to defend vigorously.
- CFTC Investigation: The Commodity Futures Trading Commission is investigating Avista Energy regarding futures trading in July 1998, specifically concerning potential market manipulation. No charges have been filed as of the report date.
- Regulatory Proceedings: The Washington Utilities and Transportation Commission (WUTC) approved deferred accounting treatment for $30.8 million in excess power costs incurred in Q3 2000. Recovery of these costs is subject to future regulatory approval. Additionally, FERC proceedings regarding California wholesale market structures may impact refunds or equitable relief.
- Environmental Liability: The Company is a potentially liable party for environmental remediation at the former Spokane Natural Gas Plant site.
Investor Verification Checklist
- Power Cost Deferral Recovery: Verify the status of the WUTC proceeding regarding the recovery of the $30.8 million in deferred power costs and the timeline for rate adjustments.
- Trading Position Exposure: Confirm that Avista Utilities has fully ceased speculative trading activities and that current positions are strictly for system resource optimization.
- Litigation Status: Monitor the consolidation and progress of the securities class-action lawsuits and the outcome of the CFTC investigation.
- Capital Structure: Review the impact of the Series L Preferred Stock conversion on future dividend obligations and the current debt-to-equity ratio (51% debt, 40% equity as of Sept 30, 2000).
- Collateral Requirements: Assess the sufficiency of cash and letters of credit ($99 million outstanding) to meet counterparty collateral calls in volatile energy markets.