Avista Corporation 10-Q Summary: Period Ended June 30, 2003
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2003, and the six months ended June 30, 2003, for Avista Corporation, an energy company engaged in the generation, transmission, and distribution of energy. The company operates through four primary segments: Avista Utilities (regulated utility operations), Energy Marketing and Resource Management (non-regulated trading), Avista Advantage (facility intelligence services), and Other. The filing includes unaudited financial statements and management discussion regarding regulatory matters, market risks, and discontinued operations.
Key Financial Metrics
| Metric (Six Months Ended June 30, 2003) | 2003 (in thousands) | 2002 (in thousands) |
|---|---|---|
| Operating Revenues | $530,274 | $546,234 |
| Income from Continuing Operations | $31,155 | $29,268 |
| Net Income | $25,101 | $21,445 |
| Income Available for Common Stock | $23,976 | $20,229 |
| Earnings Per Share (Diluted) | $0.50 | $0.42 |
| Net Cash Provided by Operating Activities | $123,377 | $211,983 |
| Total Debt (Current + Long-Term) | $977,720 | $1,004,531 |
| Cash and Cash Equivalents | $219,542 | $186,269 |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased by $16.0 million (2.9%) compared to the prior year, primarily driven by a $10.3 million decrease in Avista Utilities revenues due to lower natural gas rates and milder weather, partially offset by a $27.4 million increase in Energy Marketing revenues.
- Profitability Improvement: Net income increased by $3.7 million (17.1%) year-over-year. This was driven by reduced losses in the "Other" and "Avista Advantage" segments and a decrease in interest expense due to significant debt repurchases.
- Accounting Changes: The company recorded a cumulative effect of accounting change charge of $1.2 million (net of tax) related to the transition from EITF Issue No. 98-10 to SFAS No. 133 for energy trading contracts. This transition increased earnings volatility.
- Discontinued Operations: The company reported a loss from discontinued operations of $4.9 million, primarily due to an impairment charge of $2.5 million related to the divestiture of Avista Labs (fuel cell manufacturing).
- Debt Reduction: Total debt decreased by $26.8 million from the prior year-end, reflecting the repurchase of $27.2 million in long-term debt during the six-month period.
Guidance, Outlook, and Risks
- Regulatory Environment: The company is navigating significant regulatory proceedings, including the Washington Utilities and Transportation Commission's (WUTC) review of the Natural Gas Benchmark Mechanism and the Energy Recovery Mechanism (ERM). The WUTC staff has recommended terminating the Benchmark Mechanism in Washington, which could impact procurement operations.
- Federal Investigations: The Federal Energy Regulatory Commission (FERC) investigation into potential market manipulation in western energy markets (2000-2001) remains a key contingency. While an administrative law judge certified an agreement in resolution in July 2003, the final approval by FERC commissioners is pending. The company believes it has sufficient reserves for potential refunds.
- Market Risks: Avista Energy faces commodity price risk and credit risk. The company utilizes Value-at-Risk (VAR) models to manage exposure. Credit quality in the energy sector remains a concern, with several counterparties facing bankruptcy (e.g., Mirant Corporation).
- Liquidity and Capital: The company maintains a $245 million committed line of credit and is in compliance with all debt covenants. Management intends to continue repurchasing debt if market conditions warrant to reduce interest costs.
- Hydroelectric Conditions: Forecasts indicate streamflow conditions for 2003 will be approximately 88% of normal, potentially increasing reliance on purchased power and affecting deferred power costs.
Investor Verification Checklist
- FERC Resolution Status: Verify the final outcome of the FERC investigation and the certification of the agreement in resolution regarding western energy market conduct.
- Regulatory Rate Cases: Monitor the status of the Natural Gas Benchmark Mechanism in Washington and the approval of natural gas rate increases filed in August 2003.
- Deferred Power Costs: Review the recoverability of the $148.8 million in deferred power costs and the timeline for recovery through retail rates.
- Counterparty Credit Exposure: Assess the impact of the Mirant Corporation bankruptcy filing on Avista Energy's contracts and the joint ownership of the Coyote Springs 2 plant.
- Accounting Volatility: Evaluate the impact of SFAS No. 133 on future earnings volatility, particularly regarding the timing of gain/loss recognition on non-derivative contracts.