Avista Corp. Q2 2007 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2007. Avista Corp. operates primarily through its regulated utility division, Avista Utilities, providing electricity and natural gas in Washington, Idaho, Oregon, and Montana. A significant corporate event occurred on June 30, 2007, when Avista Corp. completed the sale of substantially all contracts and ongoing operations of its non-utility energy trading subsidiary, Avista Energy, to Coral Energy Holding, L.P. (a Shell subsidiary). This transaction effectively ended the Energy Marketing and Resource Management business segment.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2007 | Six Months Ended June 30, 2007 |
|---|---|---|
| Total Operating Revenues | $304.0 million | $763.2 million |
| Net Income | $14.2 million | $28.3 million |
| Earnings Per Share (Diluted) | $0.26 | $0.53 |
| Operating Cash Flow (Six Months) | $158.0 million | |
| Capital Expenditures (Six Months) | $94.6 million | |
| Total Debt | $1.09 billion (53.4% of capitalization) | |
| Cash and Cash Equivalents | $103.3 million (as of June 30, 2007) |
Material Changes vs. Prior Period
- Revenue: Total operating revenues increased 5.8% for the quarter ($304.0M vs. $287.4M) driven by higher utility revenues and non-utility energy marketing revenues. However, for the six-month period, revenues decreased 3.0% ($763.2M vs. $786.6M) primarily due to a significant drop in non-utility energy marketing revenues as trading activities wound down.
- Profitability: Net income for the quarter increased 5.4% ($14.2M vs. $13.5M). Conversely, net income for the six-month period declined 37.2% ($28.3M vs. $45.0M). The YTD decline was driven by a net loss in the Energy Marketing segment and lower utility gross margins due to higher resource costs relative to base rates.
- Segment Performance:
- Avista Utilities: Net income increased to $17.3M for the quarter but decreased to $37.2M for the six months. Gross margin pressure resulted from lower hydroelectric generation and higher fuel costs.
- Energy Marketing: Recorded a net loss of $3.9M for the quarter and $11.6M for the six months, compared to a loss of $4.6M and income of $0.4M in the prior year periods. This includes a $4.2 million pre-tax loss on the sale of Avista Energy assets.
- Balance Sheet: Total assets decreased significantly from $4.06 billion to $3.31 billion, largely due to the removal of energy commodity derivative assets and liabilities associated with the Avista Energy sale.
Guidance, Outlook, and Risks
- Avista Energy Sale Proceeds: The company expects to receive approximately $170 million in total proceeds from the Avista Energy transaction (including liquidation of remaining assets) in the third quarter of 2007. These funds are planned for redeployment into regulated utility operations.
- Capital Expenditures: Utility capital expenditures are expected to range between $180 million and $190 million for the full year 2007.
- Rate Cases: A general rate case was filed in Washington in April 2007 requesting an average 15.9% increase in electric rates and 2.3% in natural gas rates. Approval is expected by early 2008. No general rate increases are expected in 2007.
- Regulatory Equity Targets: To support a proposed holding company structure, Avista has committed to increasing its utility common equity component to 35% by end of 2007 and 38% by end of 2008 (Idaho/Washington targets). As of June 30, 2007, the utility equity component was 39.5%.
- Risks and Contingencies:
- Western Power Market Litigation: Ongoing proceedings regarding refunds and damages from the 2000-2001 energy crisis remain unresolved, though the company believes reserves are adequate.
- Environmental Compliance: New regulations regarding greenhouse gas emissions (Washington I-937) and mercury emissions (Montana) may increase capital and operating costs.
- Hydroelectric Generation: Forecasts for 2007 are near normal, but streamflow variability remains a key risk to resource costs.
Investor Verification Checklist
- Avista Energy Sale Finalization: Verify the receipt of the full ~$170 million in proceeds and the final accounting of the $4.2 million pre-tax loss on the transaction.
- Utility Rate Case Outcome: Monitor the Washington Utilities and Transportation Commission (WUTC) decision on the April 2007 rate case filing, as it is critical for future revenue recovery.
- Equity Ratio Compliance: Confirm the company meets the 35% utility equity target by year-end 2007 to avoid potential rate reductions mandated by regulators.
- Debt Maturities: Review the funding plan for $358 million in long-term debt and preferred stock maturities due in late 2007 and 2008.
- Regulatory Asset Recovery: Assess the status of deferred power and natural gas costs ($66.4 million deferred power costs as of June 30) and the timeline for recovery through retail rates.