AVA

Business Context and Reporting Period

Company: Avista Corporation (Avista Corp.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2004
Headquarters: Spokane, Washington

Avista Corp. is an energy company engaged in the generation, transmission, and distribution of energy. Its operations are divided into four segments: Avista Utilities (regulated electric and natural gas utility operations), Energy Marketing and Resource Management (trading and resource management via Avista Energy and Avista Power), Avista Advantage (utility bill processing services), and Other (various investments and non-utility operations). The company serves approximately 331,000 electric and 305,000 natural gas retail customers across eastern Washington, northern Idaho, and parts of Oregon and California.

Key Financial Metrics (2004)

Material Changes vs. Prior Period

• Net Income Decline: Net income decreased by approximately 21% to $35.2 million. This was primarily driven by a $14.4 million pre-tax write-off ($9.4 million net of tax) related to the Idaho general electric rate case, which disallowed certain deferred power costs and utility plant costs.
• Segment Performance:
  • Avista Utilities: Net income decreased to $32.5 million (from $36.2 million) due to the Idaho write-off, partially offset by general rate increases in Idaho and Washington.
  • Energy Marketing: Net income dropped to $9.7 million (from $20.7 million) due to lower natural gas trading margins and the absence of 2003 benefits from SFAS No. 133 accounting transitions and Enron affiliate settlements.
  • Avista Advantage: Turned profitable with $0.6 million net income (vs. $1.3 million loss in 2003) due to revenue growth and cost efficiencies.
  • Other: Net loss increased to $7.2 million due to goodwill impairment at AM&D and write-offs of investments.
• Revenue Growth: Total revenues increased 2.5% to $1.15 billion, driven by a 4.8% increase in Avista Utilities revenues (due to rate increases and customer growth) despite a decline in Energy Marketing revenues.
• Hydroelectric Generation: Hydro generation was 95% of normal in 2004, compared to 89% in 2003. Forecasts for 2005 indicate generation will be approximately 84% of normal.

Guidance, Outlook, and Risks

• 2005 Outlook: Management expects Avista Utilities net income to increase in 2005 due to the continued effect of general rate increases, subject to weather conditions. Avista Advantage is expected to increase net income due to improving revenues. The "Other" segment loss is expected to decrease.
• Capital Expenditures: Utility capital expenditures are expected to range from $135 million to $150 million annually for 2005-2007 (excluding the $62.5 million Coyote Springs 2 acquisition). Total long-term debt maturities and preferred stock redemptions are expected to total approximately $322 million over the next few years.
• Liquidity: The company maintains a $350 million committed line of credit. Management believes operating cash flows and credit facilities are adequate to fund capital expenditures and debt maturities, though refinancing of $54.6 million in WP Funding LP debt is required in 2005.
• Key Risks:
  • Regulatory: Timing and approval of cost recovery mechanisms (Power Cost Adjustment in Idaho, Energy Recovery Mechanism in Washington). Potential disallowance of deferred costs.
  • Market: Volatility in wholesale energy prices and natural gas costs. Credit risk from counterparties in energy trading.
  • Operational: Hydroelectric streamflow variability (forecasted lower for 2005). Potential outages at generating facilities.
  • Legal: Ongoing proceedings related to western energy market prices (2000-2001), including FERC inquiries and class-action securities litigation. Environmental remediation costs (e.g., Spokane River PCBs, Cabinet Gorge gas supersaturation).

Investor Verification Checklist

• Idaho Rate Case Impact: Verify the final status of the $14.4 million write-off and the timeline for recovering remaining deferred power costs via the Power Cost Adjustment (PCA) surcharge.
• Hydroelectric Forecasts: Monitor precipitation and streamflow data for 2005, as a forecast of 84% of normal generation could impact cash flows by approximately $25 million compared to original forecasts.
• Legal Proceedings: Track the status of the FERC inquiry into 2000-2001 market conduct and the class-action securities litigation regarding risk management controls.
• Debt Maturities: Confirm the refinancing of the $54.6 million WP Funding LP debt maturing in 2005 and the company's ability to service $322 million in upcoming debt obligations.
• Asset Sales/Acquisitions: Confirm the closing of the South Lake Tahoe natural gas properties sale (approx. $15 million) and the integration of the remaining 50% interest in Coyote Springs 2 (acquired Jan 2005 for $62.5 million).