Business Context and Reporting Period
Company: Avista Corporation (Avista Corp.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: Avista Corp. is an energy company headquartered in Spokane, Washington, engaged in the generation, transmission, and distribution of energy. The company operates through two primary reportable segments: Avista Utilities (regulated electric and natural gas operations serving eastern Washington, northern Idaho, and parts of Oregon) and Advantage IQ (a subsidiary providing utility expense management solutions). The company also holds "Other Businesses" including sheet metal fabrication and real estate investments.
Key Financial Metrics
| Metric (in thousands) | 2009 | 2008 |
|---|---|---|
| Total Operating Revenues | $1,512,565 | $1,676,763 |
| Net Income Attributable to Avista Corp. | $87,071 | $73,620 |
| Earnings Per Share (Diluted) | $1.58 | $1.36 |
| Operating Cash Flow | $258,781 | $115,378 |
| Total Assets | $3,606,959 | $3,630,747 |
| Total Debt (Long-term + Current) | $1,215,585 | $1,192,068 |
| Stockholders' Equity | $1,051,287 | $996,883 |
| Dividends Paid Per Share | $0.810 | $0.690 |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased by $164.2 million (9.8%) compared to 2008. This was primarily driven by a $179.8 million decrease in natural gas revenues due to lower wholesale prices and volumes, partially offset by a slight increase in electric revenues.
- Profitability Increase: Despite lower revenues, Net Income attributable to Avista Corp. increased by $13.5 million (18.3%). This improvement was driven by higher earnings at Avista Utilities due to implemented general rate increases in Washington and Idaho, and a decrease in interest expense.
- Segment Performance:
- Avista Utilities: Net income increased to $86.7 million from $70.0 million. Gross margin improved due to rate increases and lower wholesale power costs relative to retail rates.
- Advantage IQ: Net income decreased to $5.3 million from $6.1 million, attributed to lower interest revenue and increased amortization of intangible assets from acquisitions (Cadence Network and Ecos).
- Other Businesses: Net loss widened to $5.0 million from $2.5 million, impacted by a $3.0 million impairment of a commercial building.
- Cash Flow: Net cash provided by operating activities more than doubled to $258.8 million, reflecting improved working capital management and lower pension contributions relative to prior year accruals.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Expenditures: Utility capital expenditures were $205.4 million in 2009. The company expects expenditures to exceed $210 million annually for 2010, 2011, and 2012, focusing on generation, transmission, and distribution upgrades.
- Rate Cases: The company plans to file general rate cases in Washington and Idaho by the end of Q1 2010 and in Oregon by the end of Q2 2010 to align earned returns with authorized levels.
- Renewable Resources: The 2009 Integrated Resource Plan (IRP) identifies a need for additional renewable energy by 2016. However, the company decided to postpone new wind generation projects until the 2014-2015 timeframe.
- Dividends: A quarterly dividend of $0.25 per share was declared in February 2010.
Risks and Contingencies
- Regulatory Risk: The company faces uncertainty regarding the recovery of costs associated with the Lancaster Plant power purchase agreement in Washington, which was deferred pending future rate proceedings.
- Environmental and Climate Change: Potential legislation regarding greenhouse gas emissions (e.g., cap-and-trade) could significantly increase compliance costs and restrict generation resources. The company is monitoring state and federal developments closely.
- Weather Dependence: Results are highly sensitive to weather conditions affecting hydroelectric generation and customer demand for heating/cooling.
- Legal Proceedings: The company is involved in ongoing refund proceedings related to the 2000-2001 western energy crisis. While reserves are established, the ultimate outcome remains uncertain.
- Accounting Changes: The company is evaluating the impact of new accounting standards (SFAS 166 and 167) effective in 2010, which may require the consolidation of certain variable interest entities (e.g., Spokane Energy LLC).
Investor Verification Checklist
- Rate Case Outcomes: Verify the results of the upcoming 2010 general rate case filings in Washington, Idaho, and Oregon to confirm revenue recovery assumptions.
- Deferred Cost Recovery: Monitor the regulatory status of the deferred costs associated with the Lancaster Plant and the Energy Recovery Mechanism (ERM) in Washington.
- Environmental Compliance Costs: Track the finalization of the Total Maximum Daily Load (TMDL) process for the Spokane River and associated mitigation costs.
- Advantage IQ Valuation: Assess the potential for an initial public offering (IPO) or sale of Advantage IQ, as redemption rights for minority shareholders expire in 2011-2012.
- Debt Covenants: Confirm continued compliance with debt covenants, specifically the ratio of earnings to fixed charges and the debt-to-capitalization ratio (currently 53.6%).