Avista Corp. 10-Q Summary: Period Ended June 30, 2006
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Avista Corporation, a large accelerated filer incorporated in Washington. The report covers the three and six-month periods ended June 30, 2006. Avista operates through four primary segments: Avista Utilities (regulated electric and natural gas generation, transmission, and distribution), Energy Marketing and Resource Management (trading and optimization of energy assets), Advantage IQ (facility information services), and Other (manufacturing and investments). The company is in the process of restructuring into a holding company structure, a proposal approved by shareholders in May 2006.
Key Financial Metrics
| Metric (Six Months Ended June 30) | 2006 (in thousands) | 2005 (in thousands) |
|---|---|---|
| Total Operating Revenues | $786,596 | $635,496 |
| Net Income | $45,031 | $28,793 |
| Earnings Per Share (Diluted) | $0.91 | $0.59 |
| Net Cash Provided by Operating Activities | $161,947 | $89,299 |
| Total Assets | $4,067,037 | $4,948,494 |
| Total Debt | $1,142,238 | $1,206,411 |
| Stockholders' Equity | $818,705 | $771,128 |
Note: Total assets decreased significantly year-over-year primarily due to a reduction in energy commodity derivative assets and liabilities as market positions settled.
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 23.8% ($151.1 million) for the six months ended June 30, 2006, compared to 2005. This was driven by a 22.1% increase in utility revenues (due to rate increases and customer growth) and a 40.8% increase in non-utility energy marketing revenues.
- Profitability: Net income increased 56.4% ($16.2 million) for the six-month period. The Energy Marketing segment contributed significantly to this improvement, turning a net loss of $8.6 million in 2005 into a net income of $0.4 million in 2006.
- Utility Performance: Avista Utilities net income rose to $43.1 million from $37.4 million. This was aided by a $7.2 million benefit from the Washington Energy Recovery Mechanism (ERM) due to lower power supply costs relative to base rates, and the sale of Enron-related claims.
- Debt Reduction: Total debt decreased by $64.2 million, primarily due to a reduction in short-term borrowings under the company's line of credit.
- Accounting Changes: The company adopted SFAS No. 123R (Share-Based Payment) on January 1, 2006, resulting in the recognition of $2.0 million in stock-based compensation expense for the six-month period.
Guidance, Outlook, and Risks
- Capital Structure: The company anticipates completing its statutory share exchange to form a holding company structure in the fourth quarter of 2006. It expects to issue long-term debt in Q4 2006 to fund maturities in January 2007.
- Regulatory Matters:
- Washington Rate Case: Base rate increases effective Jan 1, 2006, are designed to increase annual revenues by $22.4 million. The company agreed to increase its utility equity component to 35% by end of 2007 and 38% by end of 2008.
- Spokane River Relicensing: The FERC license for the Spokane River Project expires August 1, 2007. Initial estimates for potential costs of conditions (specifically for the Post Falls facility) range from $400 million to $500 million over 50 years, though the company believes this is unlikely to be the final outcome.
- Legal Proceedings: The company is involved in various proceedings related to the 2000-2001 western energy crisis, including the California Refund Proceeding and Pacific Northwest Refund Proceeding. Management does not expect these to have a material adverse effect on financial condition, citing reserves and offsets against unpaid amounts.
- Liquidity: The company maintains a $320 million committed line of credit (amended in April 2006) and a $145 million facility for Avista Energy. Management believes current cash flows and credit facilities are adequate to fund operations and capital expenditures.
Investor Verification Checklist
- Hydroelectric Forecast: Verify the accuracy of the 104% of normal hydroelectric generation forecast for 2006, as deviations will significantly impact resource costs and cash flow.
- Spokane River Relicensing Costs: Monitor FERC proceedings regarding the Spokane River Project, specifically the potential $400M-$500M cost estimate for Post Falls conditions and the likelihood of regulatory recovery.
- Energy Trading Volatility: Review the "Energy Marketing and Resource Management" segment results, noting the volatility caused by differences between economic management and required accounting (SFAS 133) for derivative contracts.
- Debt Maturities: Confirm the company's ability to refinance $561 million in long-term debt and preferred stock redemptions due between 2006 and 2008.
- Equity Ratio Compliance: Track the utility equity component ratio (currently 33.9%) against the regulatory targets of 35% (2007) and 38% (2008) to avoid potential rate reductions.