Business Context and Reporting Period
Company: Avista Corporation (Avista Corp.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
Headquarters: Spokane, Washington
Avista Corp. is an energy company engaged in the generation, transmission, and distribution of energy. Its operations are divided into three reportable segments: Avista Utilities (regulated electric and natural gas utility operations), Energy Marketing and Resource Management (trading and resource management, significantly reduced in 2007), and Advantage IQ (facility information and cost management services). In 2007, the company completed the sale of substantially all contracts and operations of its Energy Marketing segment to Shell Energy, effectively ending the majority of that business line.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Total Operating Revenues | $1,417.8 million | $1,506.3 million |
| Net Income | $38.5 million | $72.9 million |
| Earnings Per Share (Diluted) | $0.72 | $1.46 |
| Operating Cash Flow | $251.6 million | $201.5 million |
| Total Assets | $3,189.8 million | $4,056.5 million |
| Total Debt (Long-term + Current) | $1,062.2 million | $1,093.9 million |
| Stockholders' Equity | $914.0 million | $914.5 million |
Material Changes vs. Prior Period
- Revenue Decline: Total operating revenues decreased by $88.5 million (5.9%) primarily due to the sale of the Energy Marketing segment, which reduced non-utility energy marketing revenues by $116.0 million. This was partially offset by a $20.4 million increase in utility revenues driven by higher natural gas sales volumes and rates.
- Net Income Decrease: Net income dropped 47% to $38.5 million. The decline was driven by a net loss of $11.9 million in the Energy Marketing segment (compared to $11.6 million income in 2006) and lower earnings at Avista Utilities.
- Utility Performance: Avista Utilities net income fell to $43.8 million from $57.8 million. This was caused by a decrease in gross margin due to higher electric resource costs (lower hydroelectric generation, higher fuel costs) and a $3.8 million regulatory disallowance of unamortized debt repurchase costs.
- Asset Reduction: Total assets decreased by approximately $867 million, largely due to the divestiture of the Energy Marketing segment's contracts and assets.
Guidance, Outlook, and Risks
Outlook and Guidance
- 2008 Utility Income: Management expects utility net income to increase in 2008 compared to 2007. Drivers include the implementation of a 9.4% electric rate increase in Washington (effective Jan 1, 2008), the non-recurrence of 2007 charges (turbine write-down, debt repurchase costs), and lower interest expense due to the maturity of high-coupon debt.
- Capital Expenditures: Utility capital expenditures are expected to be $200 million in 2008, with over $200 million projected for 2009 and 2010. A new 50 MW wind generation facility is planned for construction in 2010 or 2011 at an estimated cost of $120 million.
- Dividends: On February 15, 2008, the Board declared a quarterly dividend of $0.165 per share, a 10% increase over the previous quarter.
Risks and Contingencies
- Regulatory Risk: The company faces uncertainty regarding the recovery of deferred power and natural gas costs. If regulators disallow these costs, it could negatively impact earnings.
- Hydroelectric Relicensing: The Spokane River Project relicensing process is ongoing. New licenses could impose significant costs (estimated previously between $175 million and $500 million over 50 years) and operational restrictions.
- Legal Proceedings: The company is involved in various proceedings related to the 2000-2001 western energy markets (California and Pacific Northwest refund proceedings). While management believes reserves are adequate, outcomes remain uncertain.
- Environmental Compliance: New regulations regarding greenhouse gas emissions and mercury emissions (specifically at the Colstrip plant) may require significant capital expenditures and operating cost increases.
Investor Verification Checklist
- Rate Case Settlements: Verify the final approval and implementation details of the Washington general rate case (9.4% electric increase) and the Oregon natural gas rate case to confirm revenue projections.
- Debt Maturities: Confirm the refinancing strategy for the $318 million in long-term debt maturing in 2008, specifically the $273 million of 9.75% Senior Notes.
- Hydroelectric Generation: Monitor actual hydroelectric generation volumes against the "slightly above normal" forecast for 2008, as this significantly impacts resource costs and margins.
- Energy Marketing Divestiture: Review the final accounting treatment of the Shell Energy sale and any retained liabilities or indemnification obligations.
- Regulatory Asset Recovery: Assess the status of deferred power costs ($79.7 million total as of Dec 31, 2007) and the likelihood of full regulatory recovery.