AVA

Avista Corp. 10-Q Summary: Quarter Ended September 30, 2007

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Avista Corporation, a regulated energy company operating in Washington, Idaho, Oregon, and Montana. The reporting period covers the three and nine months ended September 30, 2007. A significant corporate event during this period was the sale of substantially all contracts and ongoing operations of its non-utility energy trading subsidiary, Avista Energy, to Coral Energy (a Shell subsidiary) on June 30, 2007. This transaction effectively ended the majority of the Energy Marketing and Resource Management segment's operations.

Key Financial Metrics

Quarterly Performance (Three Months Ended Sept 30): The company reported a net loss of $3.9 million for the quarter, compared to net income of $10.1 million in the same period of 2006. This decline was driven by a net loss in the utility segment and the cessation of profitable trading activities in the energy marketing segment.

Material Changes vs. Prior Period

• Revenue Decline: Total operating revenues decreased $48.7 million (4.5%) year-over-year for the nine-month period. This was primarily due to a $68.4 million drop in non-utility energy marketing revenues following the Avista Energy sale, partially offset by a $15.4 million increase in utility revenues driven by higher natural gas sales volumes and rates.
• Profitability Drop: Net income for the nine months fell 55.7% to $24.4 million. The Energy Marketing segment swung from a $9.2 million profit in 2006 to an $11.8 million loss in 2007, largely due to unrealized losses on derivatives and a $4.3 million pre-tax loss on the sale of assets. Utility net income also declined from $43.5 million to $31.6 million.
• One-Time Charges: The company recorded a $3.8 million regulatory disallowance of unamortized debt repurchase costs and a $2.3 million impairment charge for a turbine, both impacting the third quarter results.
• Balance Sheet Shift: Total assets decreased significantly from $4.06 billion to $3.16 billion, reflecting the removal of energy commodity derivative assets and liabilities associated with the Avista Energy divestiture.

Guidance, Outlook, and Risks

• Regulatory Settlement: In October 2007, Avista reached a settlement in its Washington general rate case. Electric rates are expected to increase by an average of 9.4% and natural gas rates by 1.7%, effective January 1, 2008. This is projected to increase annual revenues by approximately $33.5 million.
• Capital Expenditures: Utility capital expenditures for 2007 are expected to range between $190 million and $200 million. Significant projects include transmission system enhancements and generation upgrades.
• Liquidity and Debt: The company has a $320 million committed line of credit with no borrowings outstanding as of September 30, 2007. Proceeds from the Avista Energy sale ($169 million) were used to fund operations and reduce debt. However, the company anticipates needing to issue new debt securities in 2008 to fund maturities totaling $318 million that year.
• Key Risks:
  • Regulatory Risk: Uncertainty regarding cost recovery for power supply costs and the outcome of the proposed holding company formation.
  • Commodity Price Risk: Exposure to fluctuations in wholesale electricity and natural gas prices, though regulatory mechanisms (ERM/PCA) allow for partial deferral and recovery.
  • Legal Proceedings: Ongoing litigation related to western energy markets (California and Pacific Northwest refund proceedings) and environmental matters (e.g., Colstrip Generating Project, Spokane River relicensing).

Investor Verification Checklist

• Rate Case Approval: Confirm final approval of the Washington rate settlement by the Washington Utilities and Transportation Commission (WUTC) to validate the projected $33.5 million revenue increase.
• Debt Refinancing: Monitor the company's ability to refinance $318 million in debt maturing in 2008, given the current credit rating (BB+/Ba1) and market conditions.
• Hydroelectric Forecast: Verify the 2007 hydroelectric generation forecast (96% of normal) against actual precipitation data, as lower generation increases reliance on purchased power and fuel costs.
• Legal Reserves: Review the adequacy of reserves for the California and Pacific Northwest refund proceedings, as the company states it cannot predict the ultimate outcome or liability.
• Equity Targets: Track the utility equity component ratio (currently ~45%) against regulatory targets of 35% by end of 2007 and 38% by end of 2008 to avoid potential rate reductions.