Business Context and Reporting Period
Company: Avista Corporation (Avista Corp.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2001
Headquarters: Spokane, Washington
Avista Corp. is an energy company organized into four lines of business: Avista Utilities (regulated electric and natural gas operations), Energy Trading and Marketing (non-regulated trading via Avista Energy and Avista Power), Information and Technology (Avista Advantage and Avista Labs), and Other. In September 2001, the company decided to discontinue operations of Avista Communications, reporting it as a discontinued operation.
Key Financial Metrics (2001)
| Metric | 2001 Value | 2000 Value |
|---|---|---|
| Total Operating Revenues | $6,009.8 million | $7,905.6 million |
| Net Income | $12.2 million | $91.7 million |
| Income from Continuing Operations | $59.6 million | $101.1 million |
| Loss from Discontinued Operations | ($47.4 million) | ($9.4 million) |
| Diluted EPS (Total) | $0.20 | $1.47 |
| Total Assets | $4,037.2 million | $12,577.1 million |
| Long-Term Debt | $1,175.7 million | $679.8 million |
| Common Equity | $720.1 million | $724.2 million |
| Cash and Cash Equivalents | $171.2 million | $197.2 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by $1.9 billion (24%) primarily due to reduced sales volumes in the Energy Trading and Marketing segment and decreased wholesale electric sales by Avista Utilities.
- Profitability Drop: Net income fell by $79.5 million. This was driven by a $91.7 million decrease in income from continuing operations and a significant $38 million increase in losses from discontinued operations (Avista Communications).
- Discontinued Operations: Avista Communications recorded a $58.4 million pre-tax asset impairment charge in Q3 2001 as the company moved to divest the business.
- Debt Increase: Long-term debt increased by $495.9 million to fund capital expenditures (including the Coyote Springs 2 project) and cover operating cash flow deficits caused by high power costs.
- Hydroelectric Shortfall: Hydroelectric production was 181 aMW below normal (the lowest in 73 years), forcing the company to purchase expensive power on the wholesale market.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Deferred Power Costs: As of December 31, 2001, total deferred power costs were $213.3 million ($140.2 million in Washington, $73.1 million in Idaho). The Washington Utilities and Transportation Commission (WUTC) approved a 25% temporary surcharge and a 6.2% base rate increase in early 2002 to aid recovery. The company expects full recovery of deferred costs by 2007.
- Capital Projects: Construction continues on the Coyote Springs 2 power plant (280 MW), expected to be operational in Q3 2002. The company sold 50% of its interest to Mirant to share costs.
- Strategic Shifts: Avista Power will no longer pursue new non-regulated generation projects. The company is seeking equity partners for its Information and Technology businesses.
Material Risks and Contingencies
- Enron Bankruptcy: Enron filed for Chapter 11 bankruptcy in December 2001. Avista had net receivables of $17.2 million from Enron affiliates. The company estimates no significant loss due to netting mark-to-market liabilities against receivables, though the Coyote Springs 2 construction contractor (NEPCO) is an Enron subsidiary.
- Western Power Market Issues: Ongoing FERC proceedings regarding retroactive price caps and refunds in California and the Pacific Northwest could result in liabilities or offsetting claims. Avista Energy had $6.5 million in receivables from defaulting California parties.
- Montana Hydroelectric Initiative: A ballot initiative in Montana proposes creating a public agency to acquire all hydroelectric facilities in the state, potentially including Avista's largest plant, Noxon Rapids. The company intends to vigorously oppose this.
- Credit Ratings: Three major rating agencies downgraded the company's credit ratings in late 2001 to below investment grade (BB+/Ba1), increasing the cost of debt.
Investor Verification Checklist
- Deferred Cost Recovery: Verify the final outcome of the Washington general rate case filed in December 2001 and the timing of the $213.3 million deferred power cost recovery.
- Enron Exposure: Monitor the final settlement of Enron-related receivables and the status of the Coyote Springs 2 construction contract with NEPCO.
- FERC Proceedings: Track the status of FERC price mitigation and refund proceedings in California and the Pacific Northwest for potential liability impacts.
- Montana Legislation: Confirm whether the Montana Hydroelectric Security Act Initiative gathers sufficient signatures for the November 2002 ballot.
- Liquidity Covenants: Review compliance with the fixed charge coverage covenant on the $220 million line of credit, for which a waiver was obtained in September 2001.