Avista Corp. 10-Q Summary: Period Ended September 30, 2008
Business Context and Reporting Period
Avista Corporation is an energy company engaged in the generation, transmission, and distribution of energy, primarily through its regulated utility division, Avista Utilities, serving eastern Washington, northern Idaho, and parts of Oregon and Montana. The company also operates non-utility segments, including Advantage IQ (facility information and cost management). This report covers the quarterly and nine-month periods ended September 30, 2008.
Key Financial Metrics
| Metric (Nine Months Ended Sep 30, 2008) | 2008 (in thousands) | 2007 (in thousands) |
|---|---|---|
| Total Operating Revenues | $1,229,302 | $1,030,854 |
| Net Income | $56,135 | $24,402 |
| Earnings Per Share (Diluted) | $1.04 | $0.45 |
| Operating Cash Flow | $131,911 | $163,593 |
| Total Debt | $1,087,732 | $1,062,236 |
| Stockholders' Equity | $978,652 | $913,966 |
| Debt-to-Capitalization Ratio | 52.6% | 53.8% |
Note: For the three months ended September 30, 2008, Net Income was $7.359 million compared to a net loss of $3.875 million in the same period in 2007.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 19.3% year-over-year for the nine-month period, driven by a 24.5% increase in utility revenues. This was primarily due to general rate increases implemented in Washington (effective Jan 1, 2008) and Idaho (effective Oct 1, 2008), as well as increased wholesale natural gas sales volumes and prices.
- Profitability Surge: Net income more than doubled to $56.1 million. The improvement was driven by higher utility gross margins, a $5.7 million interest income benefit from an IRS tax settlement, and the absence of a $12.2 million net loss from the Avista Energy segment recorded in 2007 following its sale.
- Cost Increases: Utility resource costs rose significantly ($196.9 million increase) due to higher natural gas and electric resource costs, partially offset by rate increases and regulatory recovery mechanisms.
- Debt Refinancing: The company issued $250 million in First Mortgage Bonds in April 2008 to refinance $272.9 million of maturing Unsecured Senior Notes, reducing interest costs.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects utility capital expenditures to be approximately $200 million for 2008 and over $200 million annually for 2009 and 2010. A new 50 MW wind generation project is planned with costs exceeding $125 million, largely to be incurred between 2011 and 2013.
- Regulatory Outlook: The company plans to file general rate cases in all jurisdictions before the end of Q1 2009 to recover operating costs and capital investments. A settlement stipulation for Washington rates is pending WUTC approval, with a hearing scheduled for November 2008.
- Liquidity and Credit: The company maintains a $320 million committed line of credit and an $85 million accounts receivable sales facility. Credit ratings were upgraded to investment grade (BBB-/Baa3) in late 2007/early 2008. Management is monitoring global financial market instability and its potential impact on capital access.
- Key Risks:
- Commodity Prices: Volatility in wholesale energy prices and natural gas costs.
- Regulatory: Risk of disallowance of deferred costs or delays in rate recovery.
- Environmental: Compliance with new greenhouse gas and mercury emission regulations (e.g., Washington state laws, Montana DEQ rules) may increase capital and operating costs.
- Legal: Ongoing proceedings related to the 2000-2001 western energy crisis (California and Pacific Northwest refund proceedings), though management does not expect a material adverse effect.
Investor Verification Checklist
- Rate Case Approvals: Verify the final approval and effective dates of the Washington general rate case settlement and upcoming filings in other jurisdictions.
- Debt Maturities: Confirm the successful remarketing of $83.7 million in Secured Pollution Control Bonds due December 30, 2008.
- Pension Funding: Monitor 2009 pension plan contribution requirements, which may increase significantly due to market declines in plan assets.
- Advantage IQ Monetization: Track progress on the potential initial public offering or sale of Advantage IQ, including the $31.1 million redemption liability associated with the Cadence Network acquisition.
- Environmental Compliance Costs: Assess the final capital cost estimates for mercury control systems at the Colstrip plant and compliance with Washington's greenhouse gas bill.