Business Context and Reporting Period
Company: Avista Corporation (Avista Corp.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Headquarters: Spokane, Washington
Avista Corp. is an energy company organized into four lines of business: Avista Utilities (regulated electric and natural gas operations), Energy Trading and Marketing (non-regulated trading via Avista Energy and Avista Power), Information and Technology (Avista Advantage and Avista Labs), and Other. The company serves approximately 320,000 electric and 290,000 natural gas retail customers across Washington, Idaho, Oregon, and California.
Key Financial Metrics (2002)
| Metric | 2002 Value | 2001 Value |
|---|---|---|
| Total Operating Revenues | $980.4 million | $1,395.3 million |
| Net Income | $31.3 million | $12.2 million |
| Income from Continuing Operations | $34.3 million | $59.6 million |
| Diluted EPS (Total) | $0.60 | $0.20 |
| Operating Cash Flow (Continuing) | $331.3 million | ($76.1 million) used |
| Total Assets | $3,614.1 million | $4,037.2 million |
| Long-Term Debt | $902.6 million | $1,175.7 million |
| Common Equity | $712.8 million | $720.1 million |
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased $414.9 million (29.7%) primarily due to a $336.9 million drop in Avista Utilities revenues. This was driven by an 87% decrease in wholesale electric revenues as high-price contracts expired and market prices normalized, partially offset by increased retail revenues from rate hikes.
- Profitability Improvement: Despite lower revenues, Net Income increased significantly ($19.1 million) due to a $396.5 million reduction in resource costs (purchased power and fuel) and improved operating cash flows.
- Segment Performance:
- Avista Utilities: Net income rose to $36.4 million from $24.2 million, aided by a 19.3% base rate increase in Washington and the recovery of deferred power costs.
- Energy Trading: Net income fell to $22.4 million from $63.2 million due to reduced market volatility and lower trading margins.
- Discontinued Operations: Avista Communications recorded a net income of $1.1 million in 2002, a turnaround from a $47.4 million loss in 2001 which included $58.4 million in asset impairment charges.
- Debt Reduction: Total debt decreased by $248.1 million to $1,004.5 million, driven by the repurchase of $203.6 million in long-term debt and reduced short-term borrowings.
Guidance, Outlook, and Risks
- 2003 Earnings Outlook: Management expects consolidated earnings in the range of $0.80 to $1.00 per diluted share. This includes projected earnings of $0.60–$0.80 for Utilities, $0.20–$0.30 for Energy Trading, and a loss of $0.10–$0.15 for Information and Technology.
- Regulatory Recovery: The company is recovering deferred power costs through surcharges in Washington (Energy Recovery Mechanism) and Idaho (Power Cost Adjustment). Total deferred power costs were $155.3 million as of year-end 2002, with recovery projected to continue into 2009.
- Accounting Changes: Effective January 1, 2003, Avista Energy transitioned from EITF 98-10 to SFAS No. 133 for derivative accounting. This is expected to increase earnings volatility but not change underlying cash flows.
- Key Risks:
- FERC Proceedings: Ongoing investigations into California and Pacific Northwest energy markets regarding potential refunds and price caps. The company has reached an agreement in principle with FERC staff finding no evidence of market manipulation.
- Hydroelectric Variability: 2003 streamflows are forecast at 70% of normal, which may increase reliance on purchased power or thermal generation.
- Credit Ratings: Corporate credit ratings remain below investment grade (BB+/Ba1) due to historical liquidity concerns, though the outlook was changed to "Stable" by S&P and Fitch in late 2002.
Investor Verification Checklist
- Deferred Cost Recovery: Verify the timeline and regulatory approval for the recovery of the $155.3 million in deferred power costs.
- FERC Resolution: Monitor the final FERC decision on the California and Pacific Northwest refund proceedings to assess potential liability.
- Hydroelectric Forecasts: Track 2003 streamflow conditions against the 70% of normal forecast to evaluate potential cost impacts.
- Accounting Transition: Review Q1 2003 results to assess the impact of the SFAS No. 133 transition on earnings volatility.
- Debt Covenants: Confirm continued compliance with the 65% debt-to-capitalization covenant on the $225 million credit facility.