Avista Corporation 10-Q Summary: Period Ended September 30, 2005
Business Context and Reporting Period
This is a Quarterly Report on Form 10-Q for Avista Corporation, an energy company engaged in the generation, transmission, and distribution of electricity and natural gas, as well as energy marketing and resource management. The report covers the three and nine months ended September 30, 2005. The Company operates primarily in Washington, Idaho, and Oregon, with a non-utility segment (Avista Energy) involved in trading and marketing.
Key Financial Metrics
| Metric (Nine Months Ended Sept 30) | 2005 ($ in thousands) | 2004 ($ in thousands) |
|---|---|---|
| Operating Revenues | $901,175 | $811,172 |
| Net Income | $19,756 | $12,574 |
| Net Income (Three Months) | $(9,037) | $(9,782) |
| Diluted EPS (Nine Months) | $0.40 | $0.26 |
| Diluted EPS (Three Months) | $(0.19) | $(0.20) |
| Operating Cash Flow (Nine Months) | $150,888 | $68,128 |
| Total Assets | $5,559,035 | $3,706,181 |
| Total Debt | $1,166,708 | $1,168,908 |
| Stockholders' Equity | $753,958 | $753,205 |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased $90.0 million (11.1%) year-over-year for the nine-month period, driven by general rate increases in Idaho and Washington and higher wholesale sales volumes.
- Profitability: Net income for the nine months increased $7.2 million (57.2%). However, the Company reported a net loss for the third quarter of 2005 ($9.0 million) compared to a net loss of $9.8 million in the same period in 2004.
- Segment Performance:
- Avista Utilities: Net income improved significantly to $35.6 million (nine months) due to rate increases and a $4.1 million gain on the sale of South Lake Tahoe properties. This was partially offset by the absorption of $7.5 million of the "dead band" under the Energy Recovery Mechanism (ERM) in Washington.
- Energy Marketing and Resource Management: Incurred a net loss of $16.9 million (nine months) compared to net income of $3.8 million in 2004. Losses were primarily due to unfavorable natural gas price movements and accounting mismatches regarding natural gas inventory management.
- Balance Sheet Expansion: Total assets increased by approximately $1.85 billion, largely due to the mark-to-market valuation of energy commodity assets and liabilities held by Avista Energy.
Guidance, Outlook, and Risks
- Outlook: Management expects Avista Utilities' net income for the full year 2005 to increase compared to 2004, driven by rate increases, subject to weather impacts in the fourth quarter. Hydroelectric generation is forecasted to be approximately 94% of normal for 2005.
- Capital Plan: The Company expects to issue up to $100 million of long-term debt in the fourth quarter of 2005 to refinance borrowings on its committed line of credit.
- Regulatory Matters: A settlement agreement regarding a Washington general rate case was reached in August 2005, proposing a 7.7% electric rate increase effective January 1, 2006, pending regulatory approval.
- Risks and Contingencies:
- Legal Proceedings: The Company is involved in multiple proceedings related to the 2000-2001 western energy crisis, including FERC inquiries and class-action securities litigation. Management does not currently expect these to have a material adverse effect.
- Commodity Prices: Volatility in natural gas and power prices remains a significant risk, particularly for the Energy Marketing segment.
- Environmental: Ongoing remediation costs for sites such as the Spokane River and Hamilton Street Bridge, and potential future costs related to EPA mercury emission regulations.
Investor Verification Checklist
- Energy Trading Losses: Verify the magnitude and reversibility of the $16.9 million loss in the Energy Marketing segment, specifically regarding the accounting treatment of natural gas inventory versus derivative contracts.
- Regulatory Recovery: Confirm the status of the Washington general rate case settlement and the timeline for the recovery of deferred power costs ($97.7 million deferred as of Sept 30, 2005).
- Legal Exposure: Monitor the status of the California Refund Proceeding and the class-action securities litigation, noting that while management expects no material impact, outcomes remain uncertain.
- Hydroelectric Forecast: Track actual precipitation and streamflow data in the fourth quarter to validate the 94% of normal generation forecast and its impact on purchased power costs.
- Debt Refinancing: Confirm the successful issuance of the planned $100 million long-term debt in Q4 2005 to reduce reliance on the short-term line of credit.